When you’re a business owner, one of the key questions you might have is, “How should I pay myself?” The answer isn’t one-size-fits-all and depends on various factors, including your company’s structure, financial situation, and your personal financial goals. However, finding the most tax-efficient method is often a priority for many entrepreneurs. In this blog, Rhys Mainwaring, Senior Accountant at eAccounts explores some common ways to pay yourself from your company and discuss the tax implications associated with each.
Paying yourself a regular salary is one of the most straightforward methods. This approach involves setting up a formal payroll system, deducting income tax and National Insurance Contributions (NICs) at source, and reporting the payments to HM Revenue and Customs (HMRC).
- Income Tax: You’ll pay income tax on your salary at the applicable tax rates.
- NICs: Both you and your company may be required to pay NICs, depending on the salary amount.
If you operate as a limited company, you can also pay yourself in the form of dividends. Dividends are typically taken from the company’s post-tax profits, meaning you’ve already paid Corporation Tax on this money.
- Dividend Tax: Dividends have their own tax rates, often lower than income tax rates, making them a tax-efficient option. However, there is a tax-free dividend allowance, and beyond that, you pay dividend tax at various rates depending on your total income.
Awarding yourself bonuses can be another effective way to take money out of your company. Bonuses can be performance-based or given at your discretion.
- Income Tax: Bonuses are typically taxed as income and subject to income tax.
- NICs: Both you and your company may be required to pay NICs on bonuses.
Contributing to your pension is a tax-efficient way to pay yourself and secure your financial future. Your company can make contributions to your pension fund, which can have tax benefits.
- Tax Relief: Contributions to a pension scheme can attract tax relief, reducing your overall tax liability.
- Annual Allowance: Be mindful of the annual allowance limits for pension contributions to maximise tax benefits.
If you’re a sole trader or in a partnership, you might take money from your business as owner’s drawings. This is a straightforward method, but it’s important to track these withdrawals for tax purposes.
- Income Tax: Depending on your overall income, owner’s drawings may be subject to income tax.
Reimbursable Business Expenses:
You can also reduce your taxable income by having your company reimburse you for legitimate business expenses. This can include expenses like travel, meals, and equipment.
- Tax Deductions: Reimbursed expenses are typically not subject to tax.
In conclusion, the best way to pay yourself from your company depends on your specific circumstances. It’s crucial to consult with a qualified accountant or tax advisor who can provide personalised guidance tailored to your business and financial goals. They can help you strike the right balance between salary, dividends, bonuses, and other methods to optimise your income while minimising tax liabilities. Remember that tax laws and regulations can change, so staying informed and seeking professional advice regularly is essential to make the most tax-efficient decisions for your business and personal finances.