Up until now, you’ve been an employee in someone else’s company but you’ve decided it’s time to set up on your own.
A question we get asked a lot from new business owners is “What is the best way for me to take money from my business”?
Taking a salary from your new company isn’t as straightforward as looking to see what’s in the bank account and withdrawing it. You might have earned it, but that money belongs to the company, not you personally. There are however a couple of ways to keep the pennies in your pocket.
Option 1 > Salary
You can of course take a salary similar to when you were employed elsewhere. When you take a salary from your business you have to tax to pay in the form of Income Tax as well as National Insurance Tax and this comes off the gross pay.
Option 2 > Salary & Dividend
Many company directors choose to take a lower salary and top up their income through dividends. If you pay yourself as a dividend, the first £2000 is tax-free thereafter you will pay dividend tax.
It’s worth noting that dividends can only be distributed to shareholders and directors if the company has retained profits at the end of the year.
How much tax will I pay?
Salary: Your salary is paid out as part of the company expenses and assuming you are a basic rate taxpayer, you’ll pay Income Tax at 20%. Employers National Insurance (now 15.05%) is also payable along with Employees National Insurance (13.25%).
This takes the total tax paid to 48.3%.
Dividend: in this case, the tax paid would be 19% corporation tax and 8.75% dividend tax (new dividend tax rates at the basic rate band).
This is a total of 27.75% tax.
And this is why many directors choose a low salary and top up with dividends.
Disclaimer: There may be other factors to consider so please speak to an accountant to discuss your personal circumstances before deciding what to pay yourself. Also, remember Tax Rates across the UK differ.
Should you have any other questions about this or would like support with your company finances, please book a discovery call by clicking here, and let’s chat about your business needs.