One of the main questions we regularly get asked by UK directors when setting up a UK entity is how best to extract income from the company?
The main reason being is that they want to ensure they are acting in the most tax efficient way for both themselves and the company.
There is a lot of useful content out there now offering advice to directors as to how they can go about this.
But how much of this content have you needed to research on your own, rather than being advised by your accountant?
New Tax-Free Limits
With a new tax year brings new tax-free limits which many UK directors should be taking full advantage of. Entering 2021/22, the personal allowance is currently £12,570 which means this is a tax-free source of income for income tax.
Ensuring that you are over the lower earnings threshold, year on year, for national insurance, £6,240, will mean that you are fully eligible to state benefits and pensions. Exceeding the primary threshold, of £9,568, results in national insurance contributions needing to be made.
Taking A Salary
Taking a salary allows a deduction from gross profits, ultimately resulting in a reduced net profit. The effect of this means less net profit attributable to corporation tax (currently at a rate of 19% for most UK entities).
Taking A Dividend
Taking a dividend essentially means taking income from your retained profits or net profits and is only available to shareholders of a company. There is a tax-free dividend allowance of £2,000 per tax year. However, taking into account any unused personal allowance, provided you are taking a basic director salary, will also extend the tax-free dividend allowance. So, for example, if you as a director and shareholder paid yourself a basic salary of £9,568, you would still have £3,002 of your personal allowance left. Ultimately, you would then be able to take a tax-free dividend of £5,002 from the entity.
Dividend tax rates are lower than salary tax rates, which is why dividends are a more beneficial way of extracting income.
Allowable business expenses such as a use of home office, one mobile phone cost per director, and fuel (mileage claims), for example, are fully deductible within a UK entity. As a result, a lower net profit equals less corporation tax attributable from the company’s perspective.
Do you feel that you are deriving maximum advisory value from your accountants?
If not, we would be more than happy to help you.
The above are just a few examples of how we work with our clients to ensure that there is continuous tax planning throughout the tax year. With our joined approach with our personal tax team, Fusion Accountancy can work on your corporate matters, whilst advising on your personal tax.