It’s relatively straightforward being self-employed. You simply track what you earn, keep tabs on your expenses, and file your return at the end of the tax year.
But when business starts booming, you may be tempted to restructure and operate as a Limited Company, maximising your earnings and taking advantage of various benefits and initiatives available to Limited Companies in the process.
And as the director of a Limited Company – an individual legal entity in its own right – there are certain rules and regulations to which you must adhere.
For starters, you can’t just take money from your business as and when required, in contrast to a self-employed individual. The money and assets belong to the company, not the owner.
This means there are certain processes you need to follow, and that any money flowing into and out of your business bank account must be accounted for.
Four Ways to Withdraw Money
As the director of a limited company, you have four options when it comes to withdrawing funds from your business in a tax-efficient manner.
These are:
- Director’s Salary
- Dividend Payments
- Director’s Loan
- Expense Reimbursement
It’s crucial that you understand each option available to you, and how to account for the money you are withdrawing.
Paying Yourself a Salary
Even if you are the sole director of your Limited Company, you must ensure the company itself is registered as an employer with HMRC. This is because you’re technically an employee of your own company.
Depending on the level of salary you choose to pay yourself you’ll need to deduct Income Tax and National Insurance Contributions, as well as Employer’s National Insurance Contributions, from your salary and pay them directly to HMRC.
Your salary is a tax-deductible expense, taken from your profits prior to the calculation of Corporation Tax. Your company, therefore, isn’t required to pay tax on the amount paid, but if it exceeds the personal allowance threshold you may have personal tax liabilities to consider.
It’s also worth noting the National Insurance thresholds. There’s a minimum earnings ‘sweet-spot’ that protects your entitlement to future state pension and benefits, without necessarily paying any National Insurance.
Therefore, you’ll need to think very carefully about the right level of salary in order to maximise these benefits and maintain tax efficiency.
Paying Yourself Dividends
As a company director, you may elect to pay yourself a dividend on top of your salary.
Dividends are taken from your company’s profit after Corporation Tax has been deducted. As it stands, you do not have to pay tax on the first £5,000* of dividends taken in the tax year. Anything taken over and above that amount will be subject to taxation, based on the Income Tax band you’re in.
You can issue yourself dividends throughout the year as supplementary income, or as a lump sum at the end of the financial year.
* As per the Spring Budget, from April 2018 the dividend tax allowance will be reduced to £2,000.
Taking a Director’s Loan
Yet another tax efficient means of withdrawing money from your business is via a director’s loan.
This allows you to borrow money from the company through the use of a director’s loan account. This account must maintain an ongoing record of the money moved between you and the business, and show whether the account is in credit or overdrawn at any given time.
When it comes to director’s loans, the tax liabilities you’ll face will depend on the balance borrowed, and the length of time that the account is overdrawn.
The loan must be accounted for in your company’s balance sheet, as well as the Company Tax Return and your own Self-Assessment Tax Return.
What’s more, there are time limits and thresholds for the various tax charges that could enable you to take advantage of this arrangement for short-to-medium term cash flow planning. However, this again requires some careful thought and planning.
Claiming Expenses
When you pay yourself through your Limited Company, anything that exceeds your tax-free personal allowance will be subject to pay-as-you-earn (PAYE) tax.
However, there will be times when, during the course of running your business, you will need to dip into your own pocket. This might be for travel, subsistence, training, equipment, telephone and internet costs, professional subscriptions, and a range of other expenses used exclusively for work – as outlined by HMRC.
You can, therefore, reimburse yourself without attracting additional tax liabilities.
Minimise Your Tax Liabilities with Ten Forward
If you’re not already set up as a Limited Company, you may be put off by the thought of additional rules, regulations, and responsibilities as a director.
However, with the right guidance, these often complex subjects can be managed to your benefit, putting more of your hard earned cash back into your pocket.
And if you are already set up as a Limited Company, it’s important to review your allowances, timing advantages, and the other nuances of the tax system so as to maximise and plan your profit extraction effectively.
It’s especially useful if you have a one-off or unexpected event, such as a deposit for a new house, that may require you to withdraw more cash from the company than you would normally. Doing so without the appropriate level of tax planning could give rise to significant tax liabilities.
Working with a professional accountant who understands the current tax system will help you keep your accounts in order and your administration compliant and up-to-date, leaving you to get on with what you do best – running your business.
At Ten Forward, we’ll help you do just that. Our friendly tax accountants are only a phone call or email away, ready to save you time and money by handling all the important details on your behalf.
We also have an effective system for guiding you through the entire process of setting up a company and running it on a day-to-day basis. Our focus is on planning for both the short and long-term, and we’re always happy to advise on your best available options with our unique tax advice service.
So, if you’d like to find out how we can help you minimise your tax liabilities, and maximise your earnings, contact us today.
