What is the best way to pay yourself from your construction company?
You’ve built your construction business to be the most profitable it can be, and now you want to take all the profits that you’ve earned, but you’ve put in the blood, sweat, tears, and determination to get there; you don’t want to be paying more taxes than you need to in taking money out of the company that you’ve worked so hard for.
So follow my video, or read below, and I will explain all the key considerations that you, the business owner, need to deal with when taking money out of your construction business.
Can You Declare Yourself as a subcontractor?
This is an often-asked question. If you run a construction business, you cannot declare yourself as a subcontractor or sole trader to take money out of your business. You cannot be separated from your business if you own and run a company. So when you’re looking at taking money out of your business, do not ever declare yourself as being self-employed under the CIS scheme. Paying yourself this way, you could get into massive problems and owe a bucket load of tax.
Salary
A good starting point for your construction business is looking at taking a salary out of your business. So, you’d want to either take up to the national insurance or tax limit salary for the work that you’re conducting within your business. This is really cool because the company gets corporation tax relief on this salary, and you can get most of this salary payment tax-free, a win-win.
A side note, if you don’t take it, it doesn’t matter. Make sure you declare a salary even if you’ve had a poor year because you lose it if you don’t use that relief. Bear this in mind, even if you’ve had a one-off year where you’ve had a loss-making year.
Dividends
Are you taking the right amount of dividends out of your construction company?
Be careful because rates change a lot.
There are limits to consider when looking at tax planning in your tax-free personal allowance, up to £50,000, £100,000, £125,000 or over. So, depending on what category you fit in, that will be important in what level of dividends you declare.
Be aware if there’s no profit or you’ve got a negative balance sheet; you cannot take a dividend; this is illegal.
Are you Claiming all your expenses?
This may be a little bit patronising, but how many vans have you seen where construction business owners have got receipts littered all over and forgotten forever?
It’s quite easy for you to pay for these expenses on your debit card or cash you’ve got out of your pocket. But are you making sure you’re claiming all of these, or are they disappearing in a black hole?
Let me put some perspective on this; if you’re a higher-rate taxpayer, you are going to be losing 50% in tax! 19% corporation tax you are going to lose unless you’ve got the receipt, and if you’re paying for this with your own personal money, as a high-rate taxpayer, you’re going to be paying 32% dividend tax on this!
So, make sure you’re not burning money in your construction company by not claiming all of the expenses that you’re paying personally.
Interest on director's loan account
There were times, especially when you started off when you invested money in the company to get it going.
This money is invested into an account called the Director’s Loan Account. If you have a credit balance on this, which means the company owes you, you can charge interest to your company. I think this is massively attractive because you can get corporation tax relief on that interest charge, and you’re allowed to earn interest per year without paying tax. You don’t pay any dividend tax, but after that, all you do is pay income tax on that interest.
Pension
Pensions can be beneficial, but the downside is that you are locking up the money for a fixed period. Then you get over 50%, saving on money that you invest into a pension. And what’s even better than that, you’re able to use that tax relief to build your wealth further.
When you draw your pension, which normally people do when they’re retired, you’ll be able to pay a chunk of this at a Basic Rate band that is humongous, instead of paying the 50% that you’re paying now, with salary and dividends, you could potentially be taxed on that at 20%. Also, with pensions, when you first draw it down, you have the option to take 25% tax-free.
Don’t lock up too much money in a pension because you want to ensure your business is solvent and you have liquidity for cash flow.
Are you making the best use of pensions within your construction business?
Tax Planning is the key
When you’re taking money out of your business, be aware of when you’re taking it out, what effects this has on corporation tax. So let’s run through them!
Salaries are deductible for corporation tax, which means your tax is calculated afterwards, and dividends are taken after corporation tax; bear in mind that for the dividend tax you’re paying, you would need to add the corporation tax rate to determine your effective rate.
Interest that you charge on the Director’s Loan Account is a corporation tax deduction means you’re allowed to take that off your profit before corporation tax, and you pay tax on this on your self-assessment.
So, when looking at ways of extracting money out of business, look at the effective rate; there is a corporation tax charge on it and what you’re paying personally.
If this doesn’t make sense, or you find this a little bit daunting or don’t understand it, you should be sitting down with your accountant and your advisor. They should be looking at all the options and all the reliefs to make sure you’re saving the most amount of tax every single year.
Be mindful that tax rates change, and we’ve seen in the era of 2022 that taxes can go down and then up again.
But regardless of that, tax changes all the time; make sure you’re up to date with the reliefs so you’re making up-to-date decisions.
If some of this is daunting, or you’re not used to financial affairs, and you don’t find it comfortable, book a discovery call with me below.
Let’s run through what you need; I understand you don’t want to be tied up with financial jargon; you want to know you’re making the best decisions. I promise I’ll do my best to help you on this call, and there’ll be no pushy sales pitch.
