You as a director and your business are classed as two separate entities – therefore both are taxable as Corporation Tax & Personal Tax.
- Corporation Tax is based on the profits of the company after your salary, but before dividends are taken out – and is currently payable at 19% for profits under £50k
- Your salary is classed as a tax-deductible expense, so reduces the company profits.
- A director’s personal tax return covers your salary, plus the dividends taken out of the company (plus any other income – interest/rental/other investments etc).
- If you are a sole director then salary is usually taken up to the NI (National Insurance) level, then dividends are declared for the rest of the funds extracted from the company.
- Dividends will use up the rest of your tax-free personal allowance, £1k is tax free, then the remainder is taxed at 8.25%.
This is the most tax efficient way of structuring things, making the most of your allowances and lower tax rates. For example, if you were a sole trader, with a profit under £50k you’ll be paying 20% tax, plus 9% National Insurance, so there is a total of 29% tax to pay, plus class 3 NI of £179.40. If you took all the money out of the business as salary, then you’d get your tax allowance, but would be paying NI and have an effective rate of 33.8% in tax & NI.
As a Limited company you have more tax allowances and no NI to pay as a sole director (although your salary is high enough to get your tick for the year for state benefits), and a total combined tax rate of 27.25%.
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If you’d like to understand your tax options and have a comparison to see if a Limited company structure is better for your tax efficiency, please book a discovery call with us today.
