Taking money from your company.

What are your choices

For shareholders and directors of  limited companies the main ways of taking funds from the company are:

Dividends.

Owners of smaller private companies are usually the shareholders and directors. They can then choose how to withdraw funds. Currently dividends are  the most tax efficient method.

For 2017/18 the first £5,000 (reducing to £2,000 for 2018/19) is tax-free. The rates are then:

  • 7.5% if  part of the basic rate income tax band.
  • 32.5% if part of the higher rate income tax band, and
  • 38.1% on the excess.

Tax efficient benefits.

Consider:

  • Employer pensions.
  • Employer supplied pensions advice.
  • Childcare vouchers.
  • Workplace nurseries.
  • Directly contracted childcare.
  • Cycle to work schemes
  • The provision of an ultra-low emission vehicle emitting 75g CO2/km or less.
  • Meals in a staff canteen.
  • Hot drinks and water at work.
  • A mobile phone.
  • Workplace parking.
  • Christmas parties up to £150 per head.
  • Awards from an employer. Exempt up to £25 per award.
  • Financial benefit awards from an employer. Where employees come up with ideas that can make the employer money. The amount that can be claimed is the greater of 50% of the financial benefit in the first year, or 10% of the financial benefit in the first five years. In both cases this is subject to an over-riding cap of £5,000.
  •  In-house sports facilities.
  • Counselling for redundant staff.
  • Use of works buses.
  • Equipment and facilities for employees to help with their job.
  • A long service awards.
  • A trivial benefits exemption of up to £50 per benefit. This cannot be cash or a cash voucher. Limited to £300 for directors and connected persons.

There are now restrictions on salary sacrificed for benefits.

Salary.

Director’s salary 2017/18.

The income tax threshold (personal allowance) is £11,500 for 2017/18) while lower national insurance (NI) threshold is (£8,164).

For sole directors or where the “Employer’s Allowances” NIC break is being fully taken up by the business’s other employees the most tax efficient salary for 2017/18 is £8,164. This also covers State benefits contributions requirements for the year, including State pension.

If the director has no other income, there will be unused income tax allowances of £3,336 (£11,500-£8,164) which can be used against dividends. However as these are only taxed at 7.5% look at using these allowances by taking a benefit in kind from the company.

The company can claim the full cost of the benefit against tax but will have to pay employer’s NI on it. The first £3,336 of the benefit will be tax free on the director.

For directors with no other income and if there is more than one employee and the Employer’s Allowance is available then a salary of £11,500 will be more tax efficient.

Director’s salary 2018/19.

As above but the rates have increased.

Personal Allowance is £11,850.

The lower national insurance (NI) threshold is £8,424.

 

Employer’s Allowances (EA).

This is a deduction available to reduce the Employer’s NIC liability by up to £3,000 pa but is not available if the director is the only employee.

Examples.

One sole director/employee – EA not due.

One sole director and 3 employees earning less than the Secondary NI threshold (£157 per week/£8,164 pa 2017/18, (£162 per week/£8,424 pa 2018/19) – EA not due.

One sole director and at least 1 employee earning more than the Secondary NI threshold (£157 per week/£8,164 pa 2017/18, (£162 per week/£8,424 pa 2018/19) – EA due.

Two directors both earning over the Secondary NI threshold (£8,164 pa 2017/18, (£8,424 pa 2018/19) – EA due.

It seems the EA will be due if, for a second director/employee, the weekly Secondary NI threshold was exceeded once but HMRC may challenge this.

 

Published 2 March 2018.

Updated 1 April 2018.