The most tax efficient way to withdraw your salary as a director

The most tax efficient way to withdraw your money as a director/shareholder

As a director/shareholder, the first thing you will want to know is how to way yourself in the most tax efficient way. If you only pay yourselves through payroll, this is HEAVILY ineffective for tax purposes, and not only this but it will also start to eat into any cash reserves that you have in the company. That’s why we’re going to go through the most tax effective way in which to pay yourself as a company director/shareholder.

 

The first part we’re going to look at is referred to as ‘Pay as You Earn’ or ‘PAYE’. This essentially involves paying yourself a humble ‘living wage’ through the payroll of the business each month, with one of the downsides being the amount will be considerably lower than you’re used to and expect as a director/shareholder. You will, however, avoid paying tax altogether on this amount if this is your only income stream and you will still receive your “stamp” for the state pension and other state benefits. The amount is currently £719.

 

If you can claim the “Employment Allowance” you can increase your gross salary to £12,500 or the same level as the personal allowance. This is because the EA pays the first £3,000 for all employer’s national insurance meaning you are only left paying the employees national insurance currently 12% which is less than the current corporation tax percentage, which is 19%.

 

The next part to paying yourself is through something called dividends but you must be a shareholder in this case. Dividends are paid to all shareholders only when there are profits in the business for distribution after taxation having paid corporation tax at 19%. Currently, you should note there is a £2,000 dividend allowance which means that you can receive this amount of dividends in the financial year free of tax for the individual.

 

Example, if your combined income does not exceed £50k, you’ll pay 7.5% of this amount via your personal tax return. If it’s between £50k and £150k the percentage over £50k goes up to 32.5% and if it’s over £150k well you’ll be paying 38.1% on anything above £150k.

 

WORKED EXAMPLE: Based on Gross of £36,000

PAYEHYBRIDDIVIDEND CALC
Salary           36,000.00Salary     8,628.00Same as Salary for eg   36,000.00
Distribution   22,171.32Salary Taken     8,628.00
PA–         12,500.00
Total Income   30,799.32Profit   27,372.00
Taxable Income           23,500.00
PA– 12,500.00Corporation Tax@19%     5,200.68
Tax@20%             4,700.00Dividend Allowance–   2,000.00
Distribution   22,171.32
National Insurance ‘EE@12% over £8,628             3,284.64Taxable Income   16,299.32
Take Home Pay           28,015.36Tax@7.5%     1,222.45
National Insurance ‘ER@ 13% over £8,628             3,777.34Take Home Pay   29,576.87
Total Tax           11,761.98Total Tax     6,423.13
Difference Tax                         5,338.85
Total Expense           39,777.34Total Expense   36,000.00
Difference In Total Expenditure                         3,777.34
Difference in Take Home                         1,561.51

As per the example above, if you were to take £36,000 via payroll including tax, national insurance employee and employer, you would end up paying £11,761.98 in tax whereas if you took advice and used a hybrid of payroll and dividend you could pay as little as £6,423.13.

As we’ve touched upon already, dividends are payable to shareholders out of business profits after taxation meaning that if your business isn’t turning over a profit this isn’t a viable option for you. It is also worth noting, when paying out dividends you should be paying the same amount per share for all other shareholders within your class, this is unless you have made an exemption through an agreement with the shareholder in question.

 

There are a few alternative ways in which to pay yourself that include things such as pension schemes however you will be required to seek independent financial advice as some complicated tax planning has to be done to make this effective.  If you are looking for a personal loan you might want to consider a loan from your business which is one of the fastest ways to get money, however you’ll need to make a record of the amount borrowed, any repayments and consider if you’ll need to be paying tax on the loan especially if the amount is more than £10,000

 

We understand that all these different avenues of paying yourself as a director can be a little difficult to understand, which is why we suggest seeking individual tax advice, which works for both you and the company financially.

 

If you think you are currently taking money from your business in the wrong way, please contact us to book your free initial consultation to see if we can put things right.

 

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