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14 November, 2019
In general the most efficient way to extract profit from a limited company is through a mixture of salary and dividends as follows:
Salary to the National Insurance threshold (currently £8,632) or Income Tax threshold (£12,500). In the former, you will have no income tax nor NI liability but still be credited with a fully paid up NI record for the tax year. In the latter, you pay a small amount of NI and use up all of your income tax personal allowance. If the company is profitable enough to take dividends then taking salary to the NI threshold is more efficient. If there are no profits from which to draw dividends then it makes sense to take salary to the tax threshold in order to utilise the tax free allowance which will otherwise be lost. In both situations the salary can be reported either monthly or in one payroll (usually in March to avoid 11 zero notifications to HMRC). In neither case does the salary actually have to be paid to directors but can be kept as a credit in their director’s loan account until cash is available to draw down.
Dividends to the level of profit minus corporation Tax. As dividends do not attract any NI charge it is tax-efficient to take any remaining profits as dividends. You need to retain enough to pay the Corporation Tax on the profits (currently 19%), so for every £100 in profit you can take £81 as dividends. Commonly, directors will take monthly dividends to cover their normal living expenses and then review whether additional dividends can be awarded at the end of the accounting year. Dividend payments should be evidenced by a Board resolution and dividend certificate which need to be retained rather than officially filed externally. Care does need to be taken not to take excess dividends as these are taxed at 32.5% until you can prove on the next set of accounts that the excess dividends have been repaid when the tax can be reclaimed.
If there has been income from a previous employment or ongoing self-employment in the current tax year, then the salary should be reduced or ignored altogether. We would be glad to help maximise the tax benefit to you by joining up your company and personal tax planning in one place.
Blog post by: Ian Marlow