Unlike sole traders, limited directors can extract their profits from their business in a far more tax efficient way, but effective profit remuneration still requires efficient planning.
In this blog, we explain everything limited company owners need to know to take profits out of their company while keeping their personal tax liability down as much as possible.
You might think that you may as well be done with it and pay yourself a salary as a sole trader would. However, by keeping your salary low, you stand to gain significantly from tax savings.
At the very most, directors should aim to keep their pay within the personal allowance, which is £12,570 for the 2022/23 tax year. However, we recommend you keep your salary below £8,840, which is the threshold for Class 1 National Insurance contributions (NICs).
That way, you will not have to pay employers’ NICs at 15.05% but will still qualify for state benefits – as long as your salary is above £6,396.
So, put simply, we would recommend you pay yourself a salary between £6,396 and £8,840.
You will also be able to deduct your low salary from your company’s gross profits before your corporation tax bill is calculated, saving your business some money.
Just be aware that other sources of personal money, such as savings, rent and extra work may also count as income for tax purposes. As such, make sure you factor all your income before you pay yourself a salary.
If you are confused as to why we recommend you pay yourself a low salary, it is because you have the option of paying yourself primarily with dividends, which are taxed at a lower rate than income.
There is a dividend allowance, which means the first £2,000 of dividends are not taxed. How much tax you pay on the remainder of your dividend payments depends on your income tax band.
As of the 2022/23 tax year, dividends are taxed in the following manner:
- basic rate: 8.75%
- higher rate: 33.75%
- additional rate: 39.35%.
To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.
However, you can only pay out dividends when your company is making a profit. A salary, however, can still be paid out during a period of loss.
Contributing to a pension as the owner of a limited company is also a wise idea, as you can treat your contributions as a business expense that can be offset against your corporation tax bill.
You can also make personal pension contributions through your company.
Although there is a £40,000 annual pension limit, there is no tax charge when you make a contribution.
You can access and withdraw 25% of your pension pot tax-free, currently from the age of 55, with income tax charged at your marginal rate after that.
Get in touch with us to discuss your remuneration.