At Accounts & Legal we always work with our clients to ensure that cash is extracted from their business in as an efficient manner as possible. The Chancellor of the Exchequer announced that from the 6th April 2017 several new changes that will have an effect on how business owners withdraw money from their businesses.
The personal allowance has increased this year to £11.5k – up from £11k last year – meaning that you can take home up to £11.5k tax free in 2017-18 tax year. For any earnings over £11.5k and under £45k you will be taxed at 20% and anything over £45k the tax rate will be 40%. There are further tax bands but for simplicity we will keep things simple for now.
Secondly, the basic tax band of up to £45k will be taxed at 7.5%
Finally, dividends above the basic tax band will be taxed at 32.5%. Again, there are further tax bands but for simplicity we’ll leave it here.
Firstly, we typically recommend taking a low salary of the personal allowance. This allows you to receive your NI stamp and maximise your tax-free element.
Any additional amounts over and above the personal allowance threshold should be extracted as dividends allowing you to utilise the tax free dividends allowance and move onto the lower tax rate bands that dividend income attracts.
Let’s take an example: let’s assume that you would like to extract income of £40k from your business and pay a minimal amount of income tax. You record a salary of £11.5k and take the remaining £28.5k as dividends. Of that £28.5k, £5k are tax free leaving £23.5k which will be taxed at the basic dividend tax rate of 7.5%, leaving a tax liability of £1.76k or an effective tax rate of 4.4% on income in the year. Leaving you with £38.24k cash in hand at the end of the year, significantly better off than if you had taken the income as a salary.
If you would like to know what is most tax efficient way to withdraw money from your company, get in touch with one of our team of accountants who can support you in structuring your business to work for you.