You've set up a limited company, listed yourself as a Director and started trading. One common question we get from new businesses is how Director remuneration should be managed. Whether you have other employees or not, there are a number of ways to proceed, all of which have different tax implications for you and your business.
One of the main motivations for operating via a limited company is its perceived tax efficiency. If you consider that any individual earnings above £45,000 per year attract the higher tax rate of 40 per cent, the 2017-18 corporation tax rate of 19 per cent (after offsetting any allowable business expenses) feels pretty low! But this rate only applies so long as the funds stay within the business. If you want to take money out of the company to cover your personal expenditure, you need to take your personal tax circumstances into account.
If you aren't too bothered about having a regular salary income, it can be a good idea to draw the minimum salary required to maintain your National Insurance "stamp", without actually attracting National Insurance or PAYE deductions. At the moment this is £680.33 per month. Obviously you can choose to pay yourself whatever you like but your pay will be subject to PAYE and NI deductions, and the business will need to pay NI contributions of 13.8% on top of it.
Alongside your salary, you can choose to draw a dividend. Dividends are sums of money paid by a company out of profits to shareholders so if you do not have any profits, there will no dividends available! Dividends are subject to personal tax, though you will not pay any tax on the first £5,000 of dividends received in the tax year. They also count towards your annual tax free allowance which is £11,500 in 2017-18. If, therefore, you draw £680 in salary per month, you could withdraw £8,340 of dividends from the business without attracting any personal tax at all. Do be aware that you will need to complete a self-assessment tax return at the end of the year to record all your dividend income, as well as any other income streams you have outside of the business.
Ordinarily, dividends are announced at the end of the financial year but it is possible to issue them more regularly, particularly if you are working in a single director company. It is definitely worth planning out your approach to director remuneration in the early stages of your business so you know exactly what to expect from HMRC, and have all the paperwork you need.
If you want to know more about this, or how the approach could be adapted to your particular circumstances, get in touch with us via the website, twitter or email firstname.lastname@example.org