The STRATEGIC Approach to Paying Yourself from Your Limited Company!

Your personal allowance

Have you made sure that you’ve capitalised on your personal allowance? This means an amount of money you are allowed to earn every single year tax-free. Now one thing to bear in mind if you don’t use your personal allowance, you lose it.

So make sure, you are capitalizing out your personal allowance every single year because this is tax-free!

Corporation tax

When you are taking money out of your business, some strategies allow for a corporation tax deduction, and some are after corporation tax. So when you’re looking at the strategy, make sure you are taking into account your corporation tax. Yes, I understand the Limited Company is a separate legal entity, but technically from a tax point of view, it’s You. So if you’re taking money out of business after tax, make sure you’re covering that within your calculation. At the moment, the small company rate is 19%.

Ways to pay yourself from your business

• Salary. Now you might have been employed in the past when your employer declares a salary for you. That means you agree or gross pay, they deduct tax and National Insurance and pay you the net pay, the company pays that money over to HMRC and net pay hits your bank account. Now as a business owner, another thing to bear in mind is not just the effective rate you’re paying on your tax and employee’s National Insurance, the company also needs to pay the employer’s national insurance. So make sure you are taking that into account when you’re doing any bit of tax planning. 

•  Another way to take money out of the business is via a dividend. Now that dividend is after corporation tax, but you could only take a dividend if there is available profit. If you haven’t made a profit and all your reserves on your balance sheet and negative you cannot take a dividend because these are illegal under the Companies Act. So if you’re considering dividend planning, make sure you’ve got the available profits to be able to take.

• A third way to take money out of your business is interest on your Directors Loan Account. Now if you’re not sure what a Directors Loan Account is, check out our video, I go through exactly what’s included within a Directors Loan Account. Now if at any point in time, the company owes you via your loan account, you can charge interest on that capital. Now in the past, we had a really low-interest rate, and they will be really low over the last five to 10 years. But now interest rates are on the up. So you are allowed to charge a commercial rate of interest. Now I find this quite attractive because the interest charged on a Directors Loan Account, you get corporation tax relief on it, which is the current rate that saves 19%. Now personally, you’re allowed to earn a banding on interest received, which is completely tax-free, and the rest is taxed at either 20 or 40%. I think this is majorly attractive for anyone that’s got credit balances where the company owes you within your business.

Your total earnings

So your total earnings are going to be really important because, on your self-assessment, they’re all going to be added together. So when you are looking to take the money out of your business in the most effective way, look at your other income, examples of this are:

– Other interest that you’ve earned on deposits.

– Have you got any other loans that are not within an ISA that you’re receiving interest on?

– Have you got a share portfolio that’s outside of an ISA? Or a pension?

– Have you got any buy-to-let properties?

When you are looking at taking money out of your business, look at your total income because this could put you into another tax banding.

Pension

Another way to take money out of your business is via a pension. Yes, I understand putting money into a pension and locking it up for a period of time. But on entry, you’re saving your 19% corporation tax or more if you’ve got bigger profits and also your dividend tax. So if a nice round figures on entry, you are saving 50% in tax now that is massive, because this gives you an opportunity for your funds to grow and build on tax relief. I think this is a big opportunity. Per the director, you are allowed to invest 40,000 pounds into a pension per year. So this is a big opportunity for you to take money out of your business. I get it goes for a pension, but you will allow yourself to build long-term wealth, take the money and pay the tax on it later.

Monitor your numbers

There is never been easier for your accounting to be prepared on an almost real-time basis or at worst monthly. So with software like QuickBooks and Xero, you can keep your finger on the pulse all the time. So you can monitor if:

– Have you got the appropriate level of salary?

– Is there a credit balance on my Directors Loan Account, which will allow me to charge interest?

– Is there available profits for me to take?

Now, when you are taking money out of your business, make sure you’ve got this covered. Do you know what you need to live on and have fun with on a monthly basis, the better clarity that you have on this monthly number, it will be easier for you to plan for tax because you won’t be constantly going, “I can take that!” “I can take that!”

You know definitively what your monthly number is to be able to take the money. And by having great accounting, you’ll be able to make sure that you can take that with levels of profits and balances on your Directors Loan Account.

Keep up with the changes

How well are you doing with tax rate changes? Now, if you remember back to 2022 when we had Liz Truss as our prime minister, the tax rates changed quite radically. And in a blink, they changed again. So all the tax rates change regardless. So make sure you’ve got a handle on the tax rates reliefs.

So when you are extracting money out of your limited company, you are doing this in the most tax-efficient way possible.

The best type of planning is to do it before your actual year-end. And the best planning to do around tax is budgeting forward. So make sure that you’re sitting down with your accountant or your advisor and that you are planning this religiously.

You’re taking aboard every single relief that you can and also maximising your income.

Now if any of this stifled you or you’ve got some questions, please contact me here. I can take on board any questions you have and aim to give you as much value as possible and I promise there’ll be no pushy sales pitch!