It is often tax-efficient to trade as a limited company as opposed to a sole trader or partnership. This is because the tax rates on dividends and profit tends to be lower compared to national insurance and PAYE. A lot of people choose to trade as a limited company where they own a share of the limited company, i.e. be a shareholder* and they would be the director** of the limited company.
This article is going to explore effective ways of paying a shareholder and director from a limited company.
1. Salary - The most common and obvious route is to pay yourself a salary. This is when you are employed by the limited company. Being employed by the limited company means you will have to set up a PAYE scheme so you can then produce periodic payslips, usually processed monthly. For the 22/23 tax year the tax efficient salary for a one director company is £758 per month (see other article link). By running this salary through the payroll, you will not pay any national insurance and you will receive a qualifying year for state pension. If there is more than 1 director or you have other income, then this salary may need adjusting for tax efficiency. The salary can then be paid this directly from your business bank account into your personal bank account each month.
2. Dividends - You can pay yourself a dividend***. When a company has profits, dividends can be paid to the shareholders based on their shareholdings. Because dividends are paid out of taxable profits, which means once corporation tax is accounted for, if you’re drawing the money out of the business bank, I advise clients to save for their corporation tax and the tax on dividends as they go. From 5 April 2022, the first £2,000 of dividend withdrawn is tax free. Thereafter it is taxed at 8.75% (up to gross £50,570), 33.75% (gross income £50,570 - £150,000) 39.35% (gross income above £150,000). To see more tax rates for dividends please see here https://www.gov.uk/tax-on-dividends
3. Use of home as office - Often people may work from home. By working from home they can apportion some of their household expenditure to the business. There are many ways to calculate this, but you can physically pay yourself from the business bank account, straight into a personal bank account for an element of your household expenditure. It is calculated usually yearly on a case by case basis, unless you’re using the HMRC flatrate, use of home allowance. If you would like to know more about this please see here https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home
4. Vehicle Expenditure - You might use your own vehicle to go and see clients, to pick up supplies, to go to business meetings etc. If that’s the case then you may be able to claim mileage https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances. Mileage covers all of your vehicle expenditure (see below). HMRC allow for a mileage claim if you are using your privately owned vehicle for business travel. The current rates in a single tax year are 45p for the first 10,000 miles and 25p a mile thereafter. Once we go into the next tax year the mileage resets to zero so you can claim the 45p again i.e this is assuming you are doing more than 10.000 business miles.
The mileage rates are meant to cover:
The mileage inclusion is strictly for business miles only and does not cover any personal miles.
If your business is VAT registered, you can reclaim back some VAT on mileage. The following information would be needed:
5. Telephone – The provision of one mobile phone to a director or employee for private use is exempt from charge. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone and this can be paid through the business bank account.
6. Directors Loan Accounts (DLA) - A director’s loan is when withdraw money from your company that is not a salary, dividend, or expense repayment.
Any money you take from the company that isn’t a repayment of expenses must be recorded in the DLA. Each director must have their own DLA.
This is a running balance. If you vote dividend or do not withdrew you salary or expenses then you can take this at a later date.
If you withdraw more than your balance, then the DLA becomes overdrawn. If this is above £10,000 then this would be regarded as a P11D and declared on a return if the company does not charge sufficient interest on the loan. There are implications for the corporation tax as well. If the loan is not repaid 9m after the year end then s455 tax is payable. You can find out more about that here https://www.gov.uk/directors-loans
*A shareholder is any person, company, or institution that owns shares in a company's stock. A company shareholder can hold as little as one share.
**A director is an appointed or elected member of the board of directors of a company, who with other directors, has the responsibility for determining and implementing the company’s policy.
***A dividend is a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).
This article is going to explore effective ways of paying a shareholder and director from a limited company.
1. Salary - The most common and obvious route is to pay yourself a salary. This is when you are employed by the limited company. Being employed by the limited company means you will have to set up a PAYE scheme so you can then produce periodic payslips, usually processed monthly. For the 22/23 tax year the tax efficient salary for a one director company is £758 per month (see other article link). By running this salary through the payroll, you will not pay any national insurance and you will receive a qualifying year for state pension. If there is more than 1 director or you have other income, then this salary may need adjusting for tax efficiency. The salary can then be paid this directly from your business bank account into your personal bank account each month.
2. Dividends - You can pay yourself a dividend***. When a company has profits, dividends can be paid to the shareholders based on their shareholdings. Because dividends are paid out of taxable profits, which means once corporation tax is accounted for, if you’re drawing the money out of the business bank, I advise clients to save for their corporation tax and the tax on dividends as they go. From 5 April 2022, the first £2,000 of dividend withdrawn is tax free. Thereafter it is taxed at 8.75% (up to gross £50,570), 33.75% (gross income £50,570 - £150,000) 39.35% (gross income above £150,000). To see more tax rates for dividends please see here https://www.gov.uk/tax-on-dividends
3. Use of home as office - Often people may work from home. By working from home they can apportion some of their household expenditure to the business. There are many ways to calculate this, but you can physically pay yourself from the business bank account, straight into a personal bank account for an element of your household expenditure. It is calculated usually yearly on a case by case basis, unless you’re using the HMRC flatrate, use of home allowance. If you would like to know more about this please see here https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home
4. Vehicle Expenditure - You might use your own vehicle to go and see clients, to pick up supplies, to go to business meetings etc. If that’s the case then you may be able to claim mileage https://www.gov.uk/government/publications/rates-and-allowances-travel-mileage-and-fuel-allowances/travel-mileage-and-fuel-rates-and-allowances. Mileage covers all of your vehicle expenditure (see below). HMRC allow for a mileage claim if you are using your privately owned vehicle for business travel. The current rates in a single tax year are 45p for the first 10,000 miles and 25p a mile thereafter. Once we go into the next tax year the mileage resets to zero so you can claim the 45p again i.e this is assuming you are doing more than 10.000 business miles.
The mileage rates are meant to cover:
- Fuel
- Repairs and maintenance
- Road tax
- Depreciation value of the vehicle
- Insurance
- And anything else vehicle related
The mileage inclusion is strictly for business miles only and does not cover any personal miles.
If your business is VAT registered, you can reclaim back some VAT on mileage. The following information would be needed:
- Make and model of vehicle
- Fuel (diesel or petrol)
- CC of engine
5. Telephone – The provision of one mobile phone to a director or employee for private use is exempt from charge. The exemption covers the phone itself, any line rental and the cost of private calls paid for by the employer on that phone and this can be paid through the business bank account.
6. Directors Loan Accounts (DLA) - A director’s loan is when withdraw money from your company that is not a salary, dividend, or expense repayment.
Any money you take from the company that isn’t a repayment of expenses must be recorded in the DLA. Each director must have their own DLA.
This is a running balance. If you vote dividend or do not withdrew you salary or expenses then you can take this at a later date.
If you withdraw more than your balance, then the DLA becomes overdrawn. If this is above £10,000 then this would be regarded as a P11D and declared on a return if the company does not charge sufficient interest on the loan. There are implications for the corporation tax as well. If the loan is not repaid 9m after the year end then s455 tax is payable. You can find out more about that here https://www.gov.uk/directors-loans
*A shareholder is any person, company, or institution that owns shares in a company's stock. A company shareholder can hold as little as one share.
**A director is an appointed or elected member of the board of directors of a company, who with other directors, has the responsibility for determining and implementing the company’s policy.
***A dividend is a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves).
If you would like to discuss the information on this blog further please do not hesitate to get in touch.
Like always, any questions, please do not hesitate to ask.
info@togetherwecount.co.uk
www.togetherwecount.co.uk
https://g.page/Together-We-Count-Limited?gm
01273 569088
www.togetherwecount.co.uk
https://g.page/Together-We-Count-Limited?gm
01273 569088
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