What Are The Most Tax Efficient Ways of Extracting Earnings from a Limited Company
If you are looking for tax effective ways to extract earnings from a limited company you have several options. Of the choices there is no right or wrong way per se, but the right option for you depends on the nature of your business, its profits and assets together with your personal circumstances. The only way to determine which tax breaks are most efficient for your limited company is by calculating the type of earnings you are permitted to extract.
Salaries and dividends for directors
Directors of a limited company can either pay themselves a small salary or draw a dividend. Either method would leave you with around 21 per cent corporation tax to pay. However, you must be careful not to pay yourself a salary that exceeds the non-taxable threshold, currently £8,105 for the 2011/2012 tax period. If you do exceed the maximum salary allowance you will end up paying more in taxes as you will pay employers national insurance contributions as well as employees NIC´s.
The alternative to drawing a salary is to pay yourself a dividend. Because they are not tax deductible, dividends are a better option than a salary if you make substantial profits from your business. It is especially more appealing to directors approaching retirement whose pension is going to be lower than expected. However, it should be noted that the top end dividends were slashed from 42 per cent to 37.5 per cent for the 2012/2013 tax year so may not yield as much as a salary.
Tax-free mileage allowances for limited companies
If HMRC limitations on either of the above options are not appealing, you may want to look into claiming on mileage. This option is more beneficial if you drive a lot for work or own a fleet of cars to run your business. HMRC allow tax-free allowances for mileage undertaken for business purposes. The statutory rates are currently 45p a mile for the first 10,000 miles and 25p for every mile thereafter. You can also claim 24p a mile for motorbikes and 20p a mile for push bikes.
Extracting childcare and pensions
If you pay yourself and/or employees national insurance-free childcare vouchers you can deduct the fees from the total amount of payable tax. The same rule applies for pension contributions paid by the company, but only on the condition that the pension is commercially viable.
If you own the property from which you operate your business you can arrange to rent it out to your company and deduct the cost of the lease from your taxable income. Taking this option also allows you to deduct several other types of associated costs such as utility bills.
Working out the best ways to extract money from your limited company can be time-consuming and frustrating so if you need advice and assistance contact one of the qualified members of our friendly team at Taxaccolega.