So, I know this is a question probably for my accountant, but I want to do a little research myself. What is the most tax efficient way to extract earnings as an owner..?
I have a small startup that has a good revenue stream now and I want to start paying myself. The amount of earnings I want to take would put me into the highest tax bracket by default. What options can I use to try and extract earnings efficiently..?
Update Expanding the question based on the answers that have come in. It seems a good hypothetical structure would be something like this:
Are there any additional vehicles that can be used to extract earings efficiently..? What about valid expenses, pensions, etc..?
1) £7,475 PAYE (0% tax) + is a corporation expense (20%/26% tax saved)
2) £27,525 PAYE (20% tax) + is a corporation expense (20%/26% tax saved)
3) £35,000 Dividends (10% tax) - is not a corporation expense (0% tax saved)
Overall tax: 12.8% (£9,005) - corporation tax saved: £9,100
(let me know if this needs editing)
(still need to add NI to the above)
This is adapted from a previous answer of mine to a question over here.
You've got a company and you want as much of its earnings to flow your way as possible, with the smallest (legitamate) tax liability.
Pay yourself a small salary via PAYE. First pay yourself a salary in the lower tax bracket... You don't want to pay yourself a high-tax rate salary. That's just chucking money at the revenue. Set the PAYE up to deal with income tax and NI and consult the Inland Revenue / a payroll company / tax accountant if you're not sure how to do this.
The company pays corporation tax on profits... So make sure all expenses are accounted for. That includes pay and NI.
Pay yourself the rest of the profits via dividend. Given that after paying yourself a lower tax rate salary via PAYE the company is in profit, pay yourself in dividends... Dividends are a way of distributing company profits to shareholders. This is done in a pro-rata manner - so if you own 100% of the company you will receive 100% of the dividend. The dividend amount paid out is decided by the company board (you). So it could be 100% of profits. The advantage of dividends is that you don't pay employers NI on dividends (currently 13.8%).
As Marcin says - even though it seems that dividend tax rates are advantageous, after you have taken into account corporation tax on the profits the effective income tax rate is the same as if you were paid the whole lot via PAYE. The saving is entirely in that you don't pay employers NI on dividends.
Consult a tax accountant to work out the optimum balance between paying yourself via PAYE and dividends.
Hope that helps.
p.s. I'm not a tax accountant. Usual disclaimers apply!
Ideally, you would have planned for this, and arranged it so that your investment in the company was by way of loan, rather than equity. Then, your company's repayments and interest payments to you will be deductible from its taxable profits for corporation tax purposes.
Paying you benefits in kind on VATable goods will at least allow you to increase your company's input VAT costs.
Dividend and debt (re)payments are taxed at your top rate of income tax, but you avoid national insurance.
Disclaimer: Don't rely on free advice from the internet. Get a good tax solicitor or accountant. There is no such thing as cheap tax advice.