SMALL CORPORATES – Extracting money from a UK limited company in a tax-efficient manner involves considering the balance between salary, dividends, pension contributions, and other benefits. Here are some common approaches:
1. Salary
- Pay yourself a salary up to the personal allowance (£12,570 for 2024/25) or slightly above the lower earnings limit for National Insurance (NI). This maintains state pension entitlements without incurring much NI liability.
- Avoid exceeding the threshold for higher NI contributions unless necessary.
2. Dividends
- Dividends are generally taxed at a lower rate than salary. In the 2024/25 tax year, the rates are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
- The dividend allowance is £1,000 for the tax year, allowing tax-free dividends within this limit.
- Dividends must be paid from post-tax profits and follow correct legal and accounting procedures.
3. Employer Pension Contributions
- Your company can make contributions to your pension scheme. These are corporation tax-deductible and do not incur income tax or NI.
- Ensure contributions are within the annual allowance (£60,000 for 2024/25, potentially more if you have unused allowances from previous years).
4. Reimbursed Expenses
- Claim legitimate business expenses such as travel, home office costs, and equipment.
- These reimbursements are tax-free if they are incurred wholly, exclusively, and necessarily for business purposes.
5. Directors’ Loans
- You can borrow money from the company via a directors’ loan account (DLA), provided it’s repaid within nine months and one day after the end of the accounting year to avoid additional corporation tax charges (32.5% on outstanding amounts).
- Be cautious, as loans over £10,000 must be treated as a taxable benefit.
6. Tax-Free Benefits provide tax-efficient perks such as:
- Mobile phones (one per director/employee, tax-free if owned by the company).
- Cycle-to-work schemes.
- Staff parties (up to £150 per head annually, including VAT).
7. Rental Income
- If the company uses personal property (e.g., office space in your home), it can pay you market-rate rent. This is tax-deductible for the company but taxable as property income for you.
8. Shareholder Loans or Capital Reductions
- Consider restructuring your company to release funds through share buybacks or capital distributions. These may attract Capital Gains Tax (CGT) rather than income tax, potentially benefiting from the CGT annual exemption or Business Asset Disposal Relief (BADR) (10% tax rate).
9. R&D Tax Credits or Grants
- If your company qualifies for R&D tax relief, you can reduce its tax liability, allowing more profit to be extracted as dividends.
10. Timing
- Defer dividends or other payments to years with lower income to reduce overall tax exposure.
Important Considerations
Seek professional advice from BlakeBarrett Consultancy Ltd to tailor a strategy specific to your circumstances to ensure your business is compliant with the UK’s legal and regulatory framework for UK limited companies.