Personal Tax vs Corp, when you own the company!?

dobdo99

I run a small limited company with my wife, the business does not make a profit in fact run at a lost for a few years, so we lend our money to help pay the company bills. We keep careful track of this money and ensure every penny lent is recorded, in our accounts.

My question is this: every year I get to decide how much the company pays me for my work, its not much and it cant afford to actually pay me so I just add what it owes to my account of the money I have lent it. At some point in the future the company *will* make a profit, at which point can I take out the amount I have lent the company, tax free?

Assuming i'm right and it is tax free, am I better off each year paying myself up to the personal allowance to ensure that I get a bigger tax free sum in future? and to reduce my Corporation tax in the current year? ( corp tax is calculated as profits - expense, of which salaries are an expense )

any thoughts?
- regards

Pennywise

Your plan is fine if you have no other personal income, so that the wage "paid" by the company uses up your personal tax free allowance. The directors loan does indeed build up over the years, as will the company trading losses. Ultimately, when the company makes a profit, corporation tax will be reduced by uses the prior year losses and then once it has money in the bank it can pay you what is owed on your directors loan, and yes, that's tax free.

Just a couple of points, though. What are you living on? If you have other income, from another job, or property, or whatever, then your tax free personal allowance will be used, so that any "payroll" from the company would be taxable and you'd need to be paying over basic rate tax on payroll, every three months, even though you weren't drawing it. You should also be submitting end of year payroll returns (to april this year) and now monthly RTI returns from Apr 13 onwards.

If you've no other income, presumably you're on benefits, and the "payment" of wages may reduce/eliminate your benefit entitlements.

Basically, if you want the future benefit of payroll, then you have to deal with formalities and consequences as if the payroll is being paid to you. It being applied to your directors loan account is exactly the same as it being paid in cash/BACS to you, and the tax & benefits regime would likewise be as if it was paid.

If you've not been putting it through payroll and making the declarations to HMRC (payroll returns and personal tax returns) and benefits etc., then it's as if it hasn't been paid, doesn't stand, won't be a deduction in the company and won't be building up your directors loan account.

By the way, have you talked all this through with your accountant - what did they say?

dobdo99

Thank you Pennywise

I do have other income and my wife works so no benefits, and I understand I will go over my personal allowance limit. was just a sanity check on which is better corp tax reduction vs pers tax bill increase.

forgot the monthly returns though, is that to stop us jiggling our annual returns to suit?

do the monthly returns have to be submitted if its under the allowance limit?

How the hell can i work out how much I can afford to pay myself when i don't know what bills i'm going to get for the year?

Our company just exists to run a few flats we rent out.

nomunnofun

There is a requirement to make monthly PAYE returns where one's salary is more than £5668 per annum and a liability for National Insurance, both employers and employees, when above £7696 per annum. The personal tax allowance is 9445 for this tax year. What salary is being paid?

Pennywise

dobdo99 wrote: »

was just a sanity check on which is better corp tax reduction vs pers tax bill increase.

Basic rate income tax and corporation tax are the same rate, so doesn't really matter. The big thing is that with payroll, you have to pay over basic rate tax as your tax code is used for your other/main job, so you're paying tax today on wages against possible future corporation tax in years to come. Doesn't really make sense to pay payroll now and suffer the tax. The only way it would be beneficial is to keep under higher rate thresholds - ie avoiding higher rate tax in future years if your income in a single tax year would be so high.

Yes, RTI requires reporting to HMRC as and when payroll is "paid" including allocation to directors loan account, if your pay will exceed the lower NIC threshold mentioned in the above post.

dobdo99

Thanks again Pennywise

If I pay myself a 5000 salary, my corp tax bill is reduced and my pers tax bill increases by the same amount, agreed. no difference.

But in terms of the company:

A. if I pay a 5000 salary out, I get 5000 benefit (to me personally).

B. If I don't pay the salary, and leave the 5000 in the company, I get a bigger corp tax bill and no benefit?
ok the company is 5000 better off, but how to take it out?
dividend ? 20% tax
salary ok, up to per allowance, but after that 20% tax

so surely A is better, no?
if I did this for 5 years, I could take 25K out tax free

or is my logic, illogical? ( by that I mean plain wrong! )

nikki1520

Have you missed that the personal allowance is not per source of income, it covers all your income - therefore if your income from other sources exceeds the personal allowance,then there is no gain?

However, if you earn, let's say £7000 from other sources (including investments, bank interest, employment) then you could take a salary for the remainder of your personal allowance (this year £9440) of £2440 and not pay the 20% on that

zygurat789

To minimise your tax bill you need to manage your salary from your own company so that your total income is £9440. Thereafter you should pay yourselves a dividend of any available profit. This will have been taxed in the company and you will pay no more tax on it so long as you only pay tax at 20%. This avoids national insurance which you may consider to be a bad thing or a good thing.

grey_gym_sock

if you pay yourself £5000 salary, and only 20% income tax applies (i.e. no NI), you have £4000.

if, alternatively, your company retains £5000 profit, and pays 20% corporation tax on it, it has £4000. it can then (immediately or in any later year) use that cash to pay a dividends of £4000 (all of which you receive, assuming you own all the shares). this dividend comes with a 10% "dividend tax credit", of £444.44, but this doesn't involve you or your company actually paying any more tax. as a result, you income is £4444 higher, but the £444.44 tax credit covers basic rate tax on dividends, which is only charged at 10%. so you only pay more tax if you're in the higher rate tax band (or if the £4444 of extra income pushes you into it).

incidentally, if you are not otherwise getting qualifying years towards the state pension, you can get them by paying yourself a salary of more than £5668 per year. keeping the salary under £7696 per year will avoid paying any (employer or employee) NI contributions. so keeping between those limits might be best (even if it does push your total income over £9440).