Paying yourself a salary is the simplest way to get money from your business, however, it is not the most tax-efficient, so it should be combined with other methods. 

 

You can earn up to £12,570 (known as the Personal Allowance) before income tax in the tax year of 2021/2022. To protect your state pension entitlement, you will need to pay yourself at least £8,840 in the tax year of 2021/2022. 

 

Each year, we provide a tax-efficient salary strategy to our clients, based on their circumstances. For the 2021/22 tax year, as a director, and assuming you have no other sources of income, the most tax-efficient salary will usually be £797 per month. 

Dividends are payments made to company shareholders. To supplement the above salary in a tax-efficient way, you can pay yourself dividends from your after-tax company profits. 

 

If you have no other income besides the £797 per month salary, the first £3,006 of dividends is tax free (as this is covered by the remaining Personal Allowance). 

The next £2,000 of dividends will also be tax-free as is covered by the Dividend Allowance. 

 

So, at this point, you will have extracted £14,570 from the company with no Income (Personal) Tax or National Insurance due. 

 

Further dividends are then taxed based on your tax bands with the next band of dividends of £35,700 being taxed at 7.5%, before reaching the higher rate of 32.5%. 

 

See below for the 2021/2022 tax year rates: 

This clearly demonstrates that the tax paid on dividends is far less than that paid on a salary and is therefore a more tax-efficient way to get money out of your company. 

 

When choosing your combination of salary and dividends, you need to take into consideration any other forms of income you receive that could affect your tax calculations, such as savings, investment properties, or shares. 

 

Be mindful that your company cannot pay out dividends unless it is making a profit and has also set aside funds for its corporation tax liability. 

Although not immediate cash – pension contributions offer a very tax-efficient way to withdraw funds from your company whilst providing yourself with a future income once you have retired. 

 

For the 2021/2022 tax year, the maximum pension allowance is £40,000 before incurring any income tax. 

 

The company would need to make this contribution directly into your pension scheme – as an employer pension. If it does so, not only do you (personally) not pay any Income (Personal) Tax on that withdrawal, but the company also benefits from this being treated as a tax-deductible expense. This means that the amount contributed is deducted from the company profit before Corporation Tax is calculated. Based on the current rate of Corporation Tax, this means saving at a rate of 19%. 

 

It’s WIN, WIN! 

This method of getting money from your company needs to be handled with care but is a useful way of funding short term needs in a low-cost or interest-free way. 

 

When arranging a loan from your company into your personal account, you must maintain records on your company balance sheet and include them in your company tax return. If the amount borrowed is over £10,000 it will be subject to tax at the rate set by HMRC. 

 

Please note that overdrawn director’s loans can cause issues if your company becomes insolvent. 

 

I have written several blogs on Directors’ loans – and these contain a great deal more detail – please see here. 

Investing your company profits into a start-up or another company can give you another source of tax-efficient income, you can earn dividends as a shareholder in that business. 

 

Think carefully about what type of company you invest in, as investing in an Enterprise Investment Scheme or Venture Capital Trust could earn you tax credits or reduce your personal tax bill. 

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