Drawing money from my limited company

If your business is a limited company, you may wonder how best to withdraw money from it. This can be done in a combination of salary and dividend. These are both taxable in your personal tax return, but have a different effect on your company’s tax. They also have different administration responsibilities.

SALARY

  • This is deductible from the company’s profits as an expense of the business, so although you’ll pay personal tax on it, you won’t pay corporation tax.
  • Salaries often entail paying PAYE/NI and making regular returns to HMRC. However, this administration and financial burden only kicks in at a certain threshold – below that, you don’t have to run a full payroll.
  • If you’re a sole director/owner, it’s an easy thing to set up and maintain.
  • When it crosses over to you as personal taxable income, you’ll be able to set your tax-free personal allowance against it.

DIVIDEND

  • This isn’t deductible as a company expense – it’s paid out of the company profits after So it will have corporation tax charged on it.
  • When it crosses over to you as your personal taxable income, you’ll be able to set your tax-free personal allowance against it. There is also a further amount tax-free purely for dividend income, although this has reduced drastically since the 2016/17 tax year.
  • The administration of dividends is not as restrictive. You may issue dividends at any time of year, as many times as you like, for as much or little as you like – subject to it not going over your actual profits. This will then be reported in the year-end accounts as one figure for the year.

 

The most common and popular route is to draw a small salary to take advantage of the company tax deduction, but to keep below the level for having to deduct and report PAYE/NI. Then the balance of your earnings is classed as dividends.

The limits are, in order of them kicking in:

  • The National Insurance LEL (Lower Earnings Limit). You can earn up to this and pay no PAYE or NI, and also you don’t have to register as an employer at HMRC. Currently it’s £511/m (£6,136 pa).
  • The PT (Primary Threshold) allows more salary up to this level without any PAYE or NI due, but you do have to register as an employer, (potentially) run a payroll, and make regular returns to HMRC. This is currently £719/m (£8,632 pa). Many small companies pay a director’s salary to this level, for the corporation tax benefits, and outsource the admin to a payroll bureau.
  • Any salary above this will then accrue PAYE and NI liabilities, both for the employee and the company.

 

 

Copyright / quidsandquills,com / 2019