If you are running a successful business then you are going to want to take advantage of that success by means of earnings. Of course, it’s important to keep money in your business but you will also need to extract cash to ensure you have an income.
There are several ways to do this and in this article, we will cover the options.
Paying Yourself a Salary
This might seem like one of the most obvious options. For tax purposes, you’ll be considered an employee of your company. Therefore, when you pay yourself a salary you will need to pay tax and make National Insurance Contributions to HMRC on a PAYE basis.
You’ll have a tax-free allowance of £12,570 but anything above this and you will pay the following tax rates:
- £12,571 – £50,000 – 20%
- £50,001 – £150,000 – 40%
- £150,001 and above – 45%
Any earnings over £9,500 per year will be susceptible to National Insurance Contributions.
Instead of a salary, you can also extract cash using a one-off bonus as either cash or vouchers. A cash bonus will be susceptible to income tax and National Insurance Contributions. However, if you take a bonus in the form of a company car as an example, there might be different rates of tax.
As a shareholder of your company, you’ll be able to take a dividend from any profits. You’ll need to decide how much of the profits will remain in the business and how much you plan to take as dividends. This will need to be discussed and recorded at a board meeting.
Dividends can be tax efficient as you can receive up to £2,000 each year without paying income tax. Go above this and this dividend income will be added to any other income and that could push you into a higher tax band.
It’s possible for your company to make contributions to your pension fund and make significant savings on tax and NI contributions. However, this will not be accessible until you retire, so it will form part of a long-term strategy. If you make contributions to your pension fund, you could also reduce your corporation tax bill as contributions are considered a business expense.
If you require funds in the short term to cover a personal need then a director’s loan can be taken from your business. This is a source of funds that is low-cost and interest-free.
The loan is considered to be a form of income and is susceptible to tax should the loan be more than £10,000 or if you paid company interest on the loan that is lower than the rate that is set by HMRC.
There are some tax advantages that come with taking profits in order to invest in another private company. If you choose to invest in a start-up or thriving company, then you could earn dividends from this business as a personal income but they would be susceptible to income tax.
There are plenty of options available to you when it comes to extracting money from your business. Making the right choice could involve obtaining professional advice to ensure you make an informed decision.