As a business owner, one of the most important decisions you'll face is how to take money out of your company in the most tax-efficient way. In the UK, there are some good strategies you can employ to minimize tax liabilities. Let's explore some of the most effective methods:
Directors Salary: Assuming you have no other employment/self-employment income, paying yourself a director’s annual salary of £12,570 is not only tax free for you as an individual, but also an allowable expense within your business. This means your company will save between £2,388.30 – £3,142.50 in corporation tax depending on what the corporation tax rate is.
Dividends: As long as your business has a positive retained earnings figure, you can supplement your director’s salary with dividends. The first £500 you take in dividends is tax free and then any additional dividends, if you stay under the higher rate amount of £50,270, will be taxed at 8.75%. This means if you take £37,700 in dividends, only £37,200 will be taxable due to the £500 tax free allowance. Pension Contributions: Making pension contributions from your company's profits can be highly tax efficient. Currently you can contribute up to £60,000 per tax year to a pension through your limited company and this is per director. This amount is a deductible expense, meaning it will reduce your corporation tax bill. Not only that but it’s also personally tax free to put this into your pension. additionally, personal pension contributions may qualify for tax relief, further enhancing the tax efficiency of this method. This is when you are a higher-rate or additional-rate taxpayer. Conclusion:
In conclusion, the most tax-efficient way to extract funds from your company in the UK depends on various factors, including your personal circumstances, business structure, and future plans. By carefully considering these factors and implementing appropriate strategies, you can optimize your tax position while responsibly managing your company's finances. If you want to discuss this further or require us to help with your accounting needs, please contact us today. Please note this blog is for educational purposes.
The information provided does not constitute financial advice or recommendation and should not be considered as such.
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