If you’re a business owner who has made profits in your company and now wants to draw those profits out, what are your options?
Dividends and Salary
The majority of business owners will take profits out with a mixture of salary and dividends.
The salary portion is determined by current tax year legislation. As of the tax year 2019-2020, the personal allowance is £12,500 so at RJF we advise clients to draw this as a salary via PAYE.
The balance of what you need can then be drawn as a dividend payment.
Currently, you get a £2,000 tax-free dividend allowance (although last year it was £5,000) and that may change from year to year depending on the government and budget.
Up to £50,000 dividends are taxed at 7.5% and above that 32.5%. Anything over £100,000 and your personal allowance gets reduced.
Let’s look at an example:
You want to withdraw £35,000 from your business to “pay yourself”
£12,500 is drawn in the form of a salary = £0 Tax
£2,000 is drawn as a dividend at a 0% rate = £0 Tax
£20,500 is drawn as a dividend and is taxed at 7.5% = £1537.50
Tax to pay = £1537.50
(Bear in mind though that the dividend portion would already have been taxed by the company as profits, currently 19%. The salary portion, however, is a business expense)
HMRC also allow you to withdraw money from your business as a pension.
Currently, you are allowed to draw £40,000 per year from your company as a pension, tax-free. Plus it is tax deductible as an expense.
Currently, you are also allowed to go back three years – so for example, if you were to start now you could deposit £180,000 tax-free into a pension.
Of course, the problem with a pension is that it doesn’t help if you need the cash now as it’s tied up but it is a good way to invest money you know you don’t need access to.
Investments Within The Company
Another option if you don’t need the cash in your pocket is to make your money work for you by investing it within the business entity itself.
So, assume you have enough cash flow to cover your living expenses and any more you draw would perhaps be placed into investments. It often makes more financial sense to invest that money and keep it in the company, rather than withdraw it and have to pay additional tax on it before investing it.
Investment options could include things like corporate bonds.
If you don’t need the cash now but want to invest it, that is a very attractive way to do it.
(Of course, you’d still need to pay any corporation tax on any gain and pay any personal tax due once you withdraw it from the company)
Speak to us at RJF if you have any questions about how best to withdraw money from your business. We specialise in startups and early-stage businesses.
Having the right structure and planning in place now means you only pay the tax you need to and not a penny more!