Paying Yourself - The Tax Efficient Way
This month's most clicked article had an overwhelming response and we would like to share it with you all. No surprises that it’s about tax and how not to pay it! The article concerns the most tax efficient way of paying yourself.
By owning a company you can choose how to take the profits from your company, and if you make the right choices you can minimise the tax and National Insurance paid by you and the company.
The ideal scenario for the Taxman is for you to take all the profits in the form of a salary and possibly a bonus. This is because these carry the highest NI charges and ensure the tax is deducted under PAYE before you get your hands on the net income. It is good practice to pay yourself at least a small salary that is covered by your personal allowance (£7,475 for 2011/12), as this makes the best use of your tax free allowances. However, the maximum salary you can take so that neither you nor the company pay NICs is £7,072 in 2011/12. This is because the threshold for NICs is lower than the tax free threshold. You can get credit for NI contributions without actually paying any as long as the salary is above £5,304 in 2011/12.
Dividends are also a popular method that most company owners will use to extract further funds. If the gross dividend is less than the basic rate limit of £35,000 you will pay no further income tax on that income, and no NI charges. However, larger dividend payments will create an additional tax charge in your hands of 25% (for 40% taxpayers) of the net dividend or 36.1% (for 50% taxpayers).
If you don't actually need the income now another possible method is extracting the profits in another form such as employer pension contributions. Although, you will have to pay income tax on the pension you eventually receive.
You can also charge a rent for assets you own which the company uses (although this could affect the availability of entrepreneurs' relief on a sale of that asset). These assets could be real property (land) or intellectual property (e.g. patents). If you lend funds to the company it can pay you a commercial rate of interest on that loan. These profit extraction methods are free of NI charges.
We can discuss other methods of extracting profits, perhaps using your family members. Please contact us for specific advice in your own circumstances.
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