Owners and company directors can choose how and when to extract funds from their business. Yet with almost every extraction resulting in one tax charge or another, it’s important to understand how best to take money out of your business.
Salary
Taking all of your income as salary will require a PAYE scheme setting up so you can pay income tax and employee National Insurance Contributions (NICs) each time you are paid.
| Annual income | Income tax rate | NICs rate |
| £0 – £8,164 | 0% | 0% |
| £8,165 – £11,500 | 0% | 12% |
| £11,501 – £45,000* | 20% | 12% |
| £45,001* – £150,000** | 40% | 2% |
| More than £150,000 | 45% | 2% |
*For Scottish resident taxpayers this threshold is £43,000.
**For annual income between £100,000 and £123,000 you will be taxed at 40% but your personal allowance will be reduced by £1 for every £2 over £100,000.
Your business must also pay employer class 1 NICs, which is 13.8% on any salary exceeding £8,164 a year. Your company may qualify for the employment allowance, worth up to £3,000 annually, which can be offset against employer NICs, yet this is only eligible to those businesses that employ other people and don’t operate in the public sector.
Dividends
Despite an increase in dividend tax in April 2016, extracting cash from a company through dividend payments could still offer a more tax-efficient alternative to larger salaries. This, in part, is down to the fact that dividends aren’t subject to NICs.
Dividends are used to distribute profit to shareholders. This profit is any money that remains after all business expenses and liabilities are paid, plus outstanding taxes such as corporation tax and VAT.
No tax is paid on the first £5,000 of dividend payments made each year. Anything above this, is taxed depending on the following band amounts:
| £0 – £16,500 | 0% |
| £16,501 – £45,000 | 7.5% |
| £45,001 – £150,000 | 32.5% |
| More than £150,000 | 38.1% |
There are no rules governing how often you can distribute dividends, yet for easier record keeping, we recommend every quarter.
So let’s the compare the two options to see which is more beneficial. The following calculations are based on a minimum salary of £8,164.
Take as salary
| Corporation tax calculation | Tax and NICs to be paid | |
| Company profit | £50,000 | |
| Employer NICs | £6,063 | £6,063 |
| Salary | £43,937 | |
| Taxable profits | £0 | |
| NICs calculation | ||
| Employee NICs at 12% | £36,836 | £4,420.32 |
| Employee NICs at 2% | £7,101 | £142 |
| Income tax calculation | ||
| Unused personal allowance (£11,500 – £8,164) | £3,336 | |
| Income tax at 20% | £33,500 | £6,700 |
| Income tax at 40% | £7,101 | £2,840.40 |
| Total tax and NICs | £14,102.74 (plus £6,063 in employer contributions) | |
| Total take home | (£8,164 + £43,937) – £14,102.74 | £31,935.26 + £6,063 |
Take as dividend
| Corporation tax calculation | Tax and NICs to be paid | |
| Profits | £50,000 | |
| Corporation tax at 19% | £9,500 | £9,500 |
| Dividend to be paid | £40,500 | |
| Income tax calculation | ||
| Unused personal allowance (£11,500 – £8,164) | £3,336 | |
| Dividend taxed at 7.5% | £28,500 | £2,137.50 |
| Dividend taxed at 32.5% | £3,664 | £1,190.80 |
| Total tax and NICs | £3,328.30 (plus £9,500 in corporation tax) | |
| Total take home | £40,500 + £8,164 – £2,137.50 – £1,190.80 | £35,835.70 + £9,500 |
Based on the above, taking profit out of the business as dividends instead of a salary would bring home an additional £7,337.44.
For more help and advice, and to see which option would be best for your business, contact your local Champion office today.
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