You set up a company and you are working for your business. Sales are in and you are making a profit, but not seeing any benefit by working for yourself? It is almost as if you are an employee in someone else’s company.
It sounds like you are not aware of the various tax-efficient ways of withdrawing money, but we can walk you through them.
There are various ways of paying yourself. You could take a director’s salary through PAYE and draw shareholder dividends at regular intervals, or periodically when company profits allow.
Furthermore, directors’ loans and a variety of employee expenses are available, which can go towards an overall ‘package’ of benefits, dividends, salary or director loan account.
We have the expertise to assess your personal circumstances and provide you with tailored advice.
How often should I pay myself a salary?
You could pay yourself a salary as often as you need to, weekly, monthly or fortnightly.
You can also distribute dividends at any time and at any frequency throughout the year, providing there is enough profit in your company to do so.
However, you need to ensure that all the dividend payments are covered by the company profits net of corporation tax.
What else should I be aware of?
When you plan how much to take out of your company you need to consider your personal needs and if the combination or salary and dividends is enough to cover for your personal spending.
When you setup a limited company, you and the company are considered two separate legal entities. This means that any transactions between you and the company need to be recorded in an account called “Director Loan Account” (DLA).
If you remove less money from a company that you have put in, as the director you are not borrowing money. You are simply reclaiming the money they put into the business.
Depending on how much money is taken, the director’s loan account will either remain in credit or show a balance of nil. When the account is in credit, the available money can be withdrawn at any time without any tax implications.
However, if you remove more money than they put into the business (other than as a salary, dividends, or expenses), the withdrawal is treated as a benefit and classed as a director’s loan. The Director’s Loan Account is subsequently overdrawn.
Where a Director’s Loan Account remains overdrawn nine months after the end of the accounting period, S455 Tax will be charged by HMRC at the rate of 32.5%. This tax is repayable to the business once the overdrawn loan is repaid.
What about when I'm applying for a mortgage?
How you take out your profit may have an impact when applying for a mortgage so it’s worth using an adviser who understands owner-managed businesses.
The way a Limited Company Director’s income is assessed for a mortgage application differs from that of an applicant who is employed full time and typically receives a salary.
It may be more beneficial to maximise earnings if a director seeks to increase their likelihood of obtaining finance for a property purchase.
Each mortgage lender has their own set of criteria by which they will assess the eligibility of company directors or self-employed individuals.
For example, you may find that while a handful of lenders may consider retained profits within a company, the majority will ignore this completely. Some lenders can be rigorous; others are relatively straightforward.
A Limited Company Director will usually need to have their tax returns filed by a chartered accountant and can also expect to be asked for 3 months of their personal bank account statements.
What happens if I have another job?
Each tax year you are entitled to earn a certain amount of money without paying Income Tax. This is called the Personal Allowance and is £12,570 for the 2021/22 tax year.
You only get one Personal Allowance – so it’s usually best to have it applied to the job paying you the most.
If you work two jobs and neither income is above £12,570, you can split your Personal Allowance.
If your income from your second job is over £12,570, it is probably better to only withdraw dividends from your limited company.
We can work through the different scenarios and advise you on the best option for you.
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