How to extract income from a Limited Company

How do you pay yourself and what are the tax implications?

So you have set your company up, sorted out your bank account, found customers but the question I frequently get asked is "how do I pay myself"?

The options available are explained below. Each has different implications on personal and company taxes. The right answer for you may not be the same as other company owners so it is best to speak to someone who can advise you on the best version which fits your circumstances.

1. Payroll

You can pay yourself a salary. This will have to be run through a payroll system and the data electronically transmitted to HMRC via MTD (Making Tax Digital). This is the same if you want to pay yourself a bonus.

You will be taxed via Income Tax and pay Employees NIC. The current tax free allowance is £12,570. You will also have to pay Employer's NIC however if you have more than one employee you can apply for the Annual Employment Allowance so the first £5,000 is not payable.

2. Dividends

As a shareholder you may prefer to pay yourself via dividends which is taxed at a lower rate than salary and there is currently £1,000 tax free allowance in this current tax year. They are not subject to National Insurance which makes them a more tax efficient for personal taxes. The payment via dividends is only available to profit making businesses. Also it is worth noting that dividend payments are not deducted from your profits when calculating Corporation Tax which is currently between 19 - 25% depending on how much profit you have made.

3. Pension

You can make contributions into a pension scheme from your salary and make tax savings at the highest rate of tax. Also the business can also make contributions on your behalf. This also has the benefit of reducing business profits for Corporation Tax purposes.

The drawback with this as an option is that the money will not be available until you retire so that it isn't an option which can be used in isolation unless you do not need to withdraw an income from the business.

Which option is best?

It truly is a personal choice and depends on your circumstances and what it is you are trying to achieve. For business owners looking to get a mortgage in the future then salary may be the preferred route or if you are looking for the most tax efficient method and don't need as much cash then maximising pension contributions should be a considered.

At Oakdene Accountancy we can talk through your personal circumstances and calculate the tax considerations of each option. Usually clients adopt a combination of all three. Also remember that nothing is set in stone and changes can be made as circumstances change or the business develops.

At Oakdene we work with you ensure that all options are explained and help you make the best personal choice. We also remain flexible to your changing circumstances.

To summarise, each of the options has positive and negative tax implications however we can help guide you through your decision making.

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