As a business owner you can choose how to extract funds from your company. Unfortunately almost all the funds you choose to remove from your business will create a tax charge, therefore it is more practical to keep a proportion of the money invested in your company.
There are different tax charges dependent on how your fund extraction is categorized. For example you could take a salary, dividend, interest, rent or a loan as a type of fund from your company. This blog will provide the advantages and disadvantages of taking either a salary or dividends from your company.
As long as the work you complete is a reasonable reflection of the projected salary, you can choose a salary as a form of fund extraction. Your company will have to set up a PAYE scheme and report the salaries that are paid, tax under PAYE will need to be paid on a monthly basis.
The below table shows the amount of tax and national insurance you would pay on an annual salary:
|Up to £5,876
|£5,876 – £8,164
|£8,165 – £11,500
|£11,501 – £45,000*
|£45,001* – £150,000**
|More than £150,000
*For Scottish resident taxpayers this threshold is £43,000.
**Earnings above £123,000 will result in a loss of personal allowance subjecting more of your income to tax.
The main advantages of choosing a salary is:
- You have a personal income
- Even if the company makes a loss you will still be paid a salary
- If you take a salary between £5,876 and £8,164 it attracts no NIC’s therefore no tax is paid. A salary of £8,164 also counts as a qualifying year towards state pension.
- The company gains corporation tax relief on the total salary at 19%
You can extract funds through a dividend, however the company has to make a profit to be able to distribute dividends. If you take all of your funds from the company as a dividend you will pay the following tax rates:
|Annual slice of income
|Up to £11,500
|£11,501 – £16,500
|£16,501 – £45,000
|£45,001 – £150,000*
|More than £150,000
*Earnings above £123,000 will result in a loss of personal allowance subjecting more of your income to tax.
The main advantages of choosing a dividend is:
- Lower tax rates than a salary, which can result in you paying less personal tax
- Higher tax-free threshold
To take a salary or a dividend…
Sarah is the director of an interior design company, she has paid herself a minimum salary of £8,164. This is to ensure she has maintained her state pension entitlement. Sarah has made a profit before tax of £50,000 this year and would like to extract that as either a dividend or salary. She wants to maximise her net income.
If Sarah were to take an additional salary or bonus she would pay £9,540 in tax and £4,562 in NICs, therefore will take home £37,998 including the £8,164. The company will also pay class 1 NICs of £6,063.
If Sarah extracts the available profits as a dividend, she will take home £45,336 as she will pay tax of £3,328 (Includes the salary). The company will also pay corporation tax of £9,500.
By taking dividends instead of a salary, Sarah will take home an additional £7,338.
As always if you have any questions get in touch on 0845 054 8560.