Tax Efficiency vs Maximum Income

Other Income And Drawings

This information will enable us to advise on the best income strategy in order to balance your income needs with tax efficiency.

💡Any funds that you withdraw from the company will fall into 3 categories, as follows:

Expenses 💳

Costs that are wholly and exclusively for business can be paid by the company. These costs can either be paid directly from the business bank account, or reimbursed to you if you had paid for them using your personal funds. When business expenses are repaid to you there are no income tax implications.

It's important that you retain receipts (digital or paper) should you ever need to prove that the expense was incurred. This is also important as most expenses are allowable for corporation tax.

Please review the separate guidance for further information on types of claimable expenses.

Salary 💼

As director of the company, it will be your responsibility to determine whether you pay yourself a salary and at what level that will be. Salaries will be chargeable to income tax at the following rates:

*Please note that for every £2 your income exceeds £100k the personal allowance is reduced by £1. Once your income exceeds £125,140 the personal allowance is lost entirely. This then means all income will be taxed starting from 20%/19%.

Annual salary in excess of £5,000 will also be subject to employers’ national insurance of 15%, whilst annual salary between £12,570 - £50,270 will be subject to 8% employee national insurance (salary in excess of £50,270 will be subject to 2% employee NI). The employment allowance can be offset against the employers NI bill for those who qualify.

The main benefit of taking a salary is that it will be an allowable company expense and thus, reduce the corporation tax the company pays. Finding a balance between these factors is therefore a cornerstone of a tax efficient drawing strategy and rest assured your accountant can help advise you on what would be best for you.

Once you have decided on a salary level the figures will be reported to HMRC by your accountant. This will take care of the reporting and will leave you with the responsibility of making the payments to yourself and any additional employees.

Dividends 📈

Dividend income is the distribution of post-tax profits to the shareholders and is very different to that of employment income (e.g. salary). The income is still subject to income tax, however at lower rates (0%, 10.75%, 35.75% and 39.35%) and crucially doesn't attract any national insurance. These tax rates & thresholds are the same for England/Wales and Scotland.

There are a few key points to consider when paying dividends and these are:

• The company can only pay dividends from its post-tax profits. Any excess payments may be treated as a director loan which will be repayable and can come with additional obligations.
• Dividends are not taxed at source, and so you must ensure that you set aside enough funds in your personal account to cover the income tax liability after the end of the fiscal year.
• Dividends can be paid at any point in the year providing the company has the capacity to do so, although it’s recommended to pay them quarterly.

Corporate Taxes

Corporation Tax - Payable annually, 9 months and 1 day after your company year-end. The rates of corporation tax are as below and will be applied against the company profits to calculate the corporate tax payable.

Please note that the following profit thresholds are based on you having no associated companies, i.e. you only have control over your one Ltd company. If you have any associated companies the following profit thresholds are reduced. Please see our separate guidance regarding associated companies.

• 19% - Profits of £50,000 or less
• 25% - Profits over £250,000
• 26.5% - Profits between £50,000 and £250,000’ 

VAT – Payable quarterly, 1 month and 7 days after the end of each VAT period. There are various rates of VAT, however the standard rate is currently 20%.

PAYE/NI - Payable quarterly when a national insurance or income tax liability has arisen in the prior 3 months. Larger companies may need to make monthly payments, whilst smaller companies may only incur a charge in the final quarter.

Personal Taxes

Self-Assessment Tax Return - Payable annually by 31st January for the previous tax year ending 5th April. This return includes all income and gains you personally received in the tax year. Depending on tax liability levels, you may be required to also make additional payments on account towards the next tax year's liability. Payments on account will fall due on 31st January and 31st July each year and are essentially a requirement to pay money onto your HMRC account in advance so to cover the estimated tax liability for the next year.