A Guide New Directors
Six Tax Efficient Ways of Getting Paid
(17/18 Tax Year)
As a Director of a Limited Company, you are able to take advantage of tax savings you would not be able to if you were a soletrader.
There are legally safe ways to avoid paying tax in all your dealings as a company director. We have listed 6 ways
1. Paying yourself a Minimum Salary
You are able to pay yourself a minimum salary of £157 per week or £680 per month totalling £8164 per year. You will not have to pay Tax nor NI contribution on this amount but you will trigger a National Insurance credit for State Pension. You will need 30 years worth of NI credits/contribution to get the full single-tier pension at retirement.
2. Dividend Payments
As a Director you are able to withdraw tax-free dividends up to £5000 (allowance for 2017/2018) in addition to your personal tax-free allowance of £11500. Dividends withdrawn above this amount is taxed at 7.5% basic rate tax payers and rises to 32.5% for higher rate tax payers. The timing of Dividend payments can be regulated carefully to ensure the best use of your personal allowance, dividend lower rate bands and other reliefs.
3. Childcare Vouchers
Childcare vouchers can be used to pay for nursery fees and after-school club wrap around care. The first £55 per week (£243 per month or £2915 per year) will be exempt from tax and National Insurance if you are a basic rate tax payer (20%). This amount reduces to £28 and £25 per week for higher (40%) and additional (45%) tax payers respectively. The childcare provider must be a registered or approved. This is tax efficient due to the childcare voucher amount being deducted before any Tax and NI contributions are calculated. Your company can also get full tax relief for the payments.
4. Cheap Loan
As a director, you can withdraw a loan from your company of up to £10,000 at anytime during the tax year without it being classed as a benefit in kind. This loan must be repaid within 9 months of your company’s accounting period end, otherwise an extra corporation tax charge of 32.5% will be payable to HMRC by the company. This charge is reclaimable from HMRC once the loan has been paid. Loans above £10,000 will generate interest of 3.25%. but may still work out cheaper than alternative borrowing.
5. Dividend Income for a Spouse
Your spouse will be able to receive dividend income if they own some shares in your company. This can prove to be a highly tax-efficient mechanism from extracting income. Just like you, they will be entitled to a tax-free dividend payment of up to £5000. Any further dividend payments will be taxed at 7.5% until the basic tax rate limit has been reached.
6. Travel and Subsistence Costs
As a director, any expenditure necessarily incurred in travelling to perform your duties are exempt from tax. This also covers the costs of subsistence. Subsistence costs includes reasonable levels of refreshment, that being both alcoholic and non-alcoholic refreshments such as tea, coffee and soft drinks between meals. HMRC has set benchmark rates for allowable expenses and these will need to be adhered to.
These are just a few of the ways in which you can extract income from your company. As a new entrepreneur, it is important to structure your company in a way that makes it more tax-efficient. Seek professional advice from an accountant or a tax advisor to ensure you are maximising both you and your company’s income.
Taxation Laws are always changing, a valuable Accountant or Advisor will ensure you get the best out of your efforts at all time. You might think it is too expensive but think of it as 'Paid For Advice'. It will be worth it in the end....
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