Tax Advice for Business Owners

TAKING A SALARY

Assuming your business vehicle is a limited company, you can pay yourself a salary. A salary is regarded as an allowable business expense, so it will reduce the amount of Corporation Tax your business is liable for. 

Additionally, if you decide to take a salary above the Lower Earnings Limit (£6,396 for the 2022/23 tax year) then it will count towards your state pension contributions. It might be tempting to pay yourself a significant amount, but there are good reasons for being restrained. If your salary is below the National Insurance (NI) Primary threshold, you won’t need to pay employee’s NI contributions and if it’s below the NI Secondary threshold, your company won’t have to pay employer’s NICs.  

TAKING A SALARY, CONTINUED

A point to think about regarding NI contributions is that the threshold is monthly rather than annual, so if your income for one month exceeds the threshold, you’ll pay NICs even if your income is below the threshold for all the other months.  

Another point to be aware of, is that if you’re a director rather than an employee, then the threshold is annual rather than monthly and is calculated at the weekly amount x 52. 

Keeping your salary below the Personal Allowance (£12,750 for the 2022/23 tax year) will also mean you don’t pay any income tax (provided you don’t have other income that could take you over the limit).  

This may seem a poor return for all your hard work, but bear in mind that a higher salary will reduce your company’s profits, which in turn reduces the value of dividends you can pay to yourself as a shareholder. It’s all about balance, and we can do the sums for you to arrive at the most tax-optimal figure. 

PAYING YOURSELF WITH DIVIDENDS

A dividend is a share of the company’s profits, and as the company owner and a shareholder, you can pay yourself a dividend. The benefit here is that there’s less tax to pay on dividends than on income. It’s usual to take a mix of salary and dividends to ensure you pay the least possible tax. 

You have an annual dividend allowance of £2,000 which is tax free, then dividends are taxed at 7.5% for basic rate earners and 32.5% for higher rate earners. At the additional rate for those earning over £150,000, the dividend tax rate is 38.1%. Dividends are exempt from NIC. 

You can only pay yourself a dividend if there’s sufficient profit in the company to cover it. Remember profit is what remains after all the business expenses have been paid, including Corporation Tax and VAT. Should you have sufficient profit but decide not to pay dividends one year, then the profit accumulates so can potentially pay larger dividends in the future.  

CONTRIBUTING TO YOUR PENSION

Paying into a personal pension is another popular way to extract profits from your company. As a director your limited company can make pension contributions for you as an employee; it counts as a business expense so it’s deductible against Corporation Tax. So you benefit by putting money aside for the future and reduce the company’s tax bill. 

You can also, in theory, pay into your pension as an individual. However, that has no impact on your company’s profits and therefore won’t reduce Corporation Tax, so it’s more tax-efficient for your company make the payments. 

You’ll get tax relief on your pension contributions, up to your annual allowance, which is 100% of your earnings, or £40,000– whichever is lower. Above that allowance the contributions will be subject to income tax, but at a lower rate than you’d pay on your salary. 

Although you can keep putting money into your pension over the years, there’s a limit on how much you can take out, either in lump sums or a regular income, before you start paying tax on it. This is your lifetime allowance, which is currently £1,073,000.