Limited company question

djbfp

I've got a small limited company and am the only director and person in the company (ie no employees) and am not sure how to 'pay' myself, both for normal living expenses, but also to reduce the taxable company profit.
I've tried to look at doing drawings or dividends but am not sure about that. I seem to remember reading or hearing about how you can take a certain small amount out of the company account each month (£500-1000) and that doesn't have to be taxed. Does anybody know about this or how I can find out about it?

Thanks

chrismac1

You need to register a PAYE scheme and take £7,220 for the tax year. No PAYE or NI due on this but you get a year's credit to State Pension. This counts as Director's salary so is a deductible business expense. The company pays corporation tax, it is then left with profits after tax from which to declare dividends.

The salary counts as income, so do any dividends - grossed up. So a £9k net divi is £10k on your tax return. I advise all self-employed people to leave company accounts and company returns to a professional accountant unless they have experience, there are a lot more ways to mess up - expensive ways! - than for a sole trader.

Firefox1975

Chrismac is correct.

Take the full PAYE allowance at zero taxation, then take any further salary requirements as dividends which are only taxed at 10% rather than 20 or 40%.

the reason they are taxed so low is that the company will already have paid corporation tax on the dividends (as you can only take dividends from profits aquired in a previous tax year)

Firefox1975

You can also take out Directors loans, but these must be paid back within 12 months. (Also I forget, but you may have to pay interest to the company on these loans?)

also, could you withdraw capital instead? this would be tax free.

pjclar02

Sorry to be Captain Pedantic, but to clarify a couple of the above posts:

1) If you draw £7,220 as PAYE in a tax year, although there will be no PAYE or employee NIC, you will incur an employer NIC liability. To keep things simple (and avoid the need to perform payroll calculations) I would pay an annual salary of £7,072, which falls below all of the thresholds and no deductions will be required.

2) Beyond this, any amounts drawn can be treated as dividends, but these are not liable to tax at 10% as suggested above. Dividends are paid with a notional tax credit but you do not have to physically pay this tax. Therefore you can draw around a further £31,500 of dividends without incurring any personal income tax (assuming you have no other personal income).

Personally, I would keep things simple and avoid the whole director's loan idea. This adds a level of complexity you can probably do without!

Hope this is helpful

djbfp

Thanks for all the suggestions. I think the easiest thing to do is to pay myself an annual salary of the £7072 so there are no deductions and then I don't have to worry about anything else. I won't withdraw any dividends or do a loan as at the moment there isn't enough money so I'd like to keep in the account.
I also have other money coming in separately which is because I'm also self-employed, so that is where most of my living expenses etc come from, but I knew there was something that I should pay myself from the limited company to reduce the tax for that side. My pension also comes out of the limited company so that's good.

Thanks again.

chrismac1

Now you're complicating things further still. if you have other taxable income from self-employment then you'll end up paying tax and NI on the strategy suggested so far. Depending on your income level the pension coming out of the limited company may not be so good. This saves tax at 20% unless your profits are above £300k. But if your overall income from all sources is above 42,475 then a pension contribution made personally saves tax at 40%.

If you have not got an accountant, any half decent one will save you the first year fees just by sorting this lot out tax-efficiently.

djbfp

It is complicated. I was always self-employed but then I took on a small franchise and had to have a limited company for that, and everything related to that side of the business was put through the limited company. All my other stuff I continued doing out of that (I would also have had to pay a fee to the franchisee for that if I didn't). The overall income is below £42K. I was advised by a financial advisor at a bank who did my pension to take the lump sum contributions from my limited company as he said that meant it reduced the taxable profit.

I think I'll have to get an accountant - as my amounts are small I didn't think I would need to but it does seem more complicated than I thought!

chrismac1

pjclar02

Interesting one this. For the first time ever the threshholds were separated by £3 per week - this by a Government committed to tax simplification, I am glad they're not committed to complications!

What this means is that on 7,072 there is no NI but at 7,224 there is 20.98 employer's NI and no employee's to pay. However, if this is a sneaky trick by HMRC to get us all to pay extra NI then it's a stupid one. This is because a company now has 152 less profits before tax from the salary and another 20.98 less from the NI, hence pays 34.60 less corporation tax if taxed at 20% and even less if at higher rates.

So if it was a sneaky trick, it's pretty stupid as it means less tax revenue overall not more! Hahahahahaha!

pjclar02

Indeed - it must have been a mistake. It caught us out in April when we had advised a client to take £600 monthly salary - and they ended up with something like a £2 employer NIC liability!!

chrismac1

If the PAYE / NI separate rules are not scrapped - and it takes a brave politician to stand up to HMRC etc. and scrap them - then at least let's go back to one starting point for NI. Let's take all the silly bits out of the current system, starting with the wholesale tax-disallowances on entertaining customers which does not apply in many countries and simply stifles marketing activities. By all means ban the £1k a head restaurant jollies, but not the £10 a head Christmas chocs or the £10 coffee shop meeting.