Tax Efficiency vs Maximum Income

Information about the best way to withdraw funds from our company

Other Income And Drawings

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

💡 Any funds that you withdraw from the company will fall into one of the below 3 categories:

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 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 sheet 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 rates of 20%, 40% and 45%. They will also be chargeable to national insurance at 15% for employers and the respective rates of 8% and 2% for employees. 

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

Once you have decided on a salary level, the figures will be reported to HMRC on a monthly basis 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 (where relevant).

Dividends 📈

Dividend income is the distribution of post-tax profits to the company 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%, 8.75%, 33.75% and 39.35%) than employment income and crucially does not attract any national insurance. There are a few key points to consider when paying dividends, outlined below:

• The company can only pay dividends from its post-tax profits, and any excess payment may be treated as a director loan, which will be repayable and 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 its recommended to pay them quarterly.

Corporate Taxes

Corporation Tax - Payable annually, 9 months 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.

• 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, while 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 July and 31st January 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.