Following completion of your limited company formation it is important to realise from the start that the limited company is a separate legal entity to the directors who form it. The monies within the company bank account do not belong to you until they have been withdrawn as salary, dividends or expenses. Genie Accountancy can offer you advice on how to go about this, read below to find out a little more..
Expenses
Any expenses incurred by yourself on behalf of the company, should be reclaimed from your company. You will have no tax liability on these reimbursed expenses if they were allowable business expenses.
All reimbursed expenses will need to reported on your P11d by the company. Any reimbursed expenses that were actually fact Benefits in kind will be also be reported on your P11d and tax return.
Salary
If you are outside of IR35 then generally the most tax efficient method of withdrawing funds is via a combination of salary and dividends. If you are inside IR35 then you will need to withdraw your funds as deemed salary.
Deciding how much Salary to pay if outside IR35:
As the owner of the company the level of salary you choose to pay is your decision. As an office holder of the company you are not bound by the National Minimum wage so you should make your salary decision based on:
- Your personal requirements and commitments.
- Your need to ensure you have enough National Insurance Contributions credits to qualify for future access to state pensions and benefits
- Your view of risk; some commentators believe drawing low salaries may increase your risk of an HMRC investigation
Salary will be paid net of Tax and Employees National Insurance
Dividend
A Dividend is a distribution of a company’s profits after tax and is paid to all company shareholders. Company directors must decide how much of a dividend to distribute, ensuring that they can demonstrate that at the time the company had sufficient retained earnings to pay the dividend.
Dividends should be voted for at a board meeting and recorded in a minute. Dividend vouchers should also be produced on payment. Dividends are paid net of a notional 10% tax credit.
Taxation of Dividends
Dividends are paid out of Company profits after Corporation tax has been paid, they do not therefore affect the Corporation tax liability.
Dividends will attract a personal tax liability if your total income is in excess of the higher rate tax threshold. For this calculation you must gross up the Dividends that have been received and determine your overall income.
If you are a basic rate tax payer no further tax will be payable o the dividend. If you are a higher rate taxpayer dividends will be subject to wither an additional 25%/30.56% of the net dividends.
All dividend transfer payments should be kept separate from payments made for wages or expenses so that they are clearly and separately identifiable to HMRC.
