WITHDRAWING FUNDS TO DIRECTOR

[goodfella]

HI,

Hope someone can help.

I am providing consultancy services and running a ltd company at present (co year end is July).

I am paying myself via dividends at the moment – irregular amounts and dates (always have enough profit to do so). No PAYE this year so no personal tax and NI paid. I have gone over the min limit by taking dividends only and am now into the 40% tax band.

Now I need to withdraw more money from my company for a short period, what is the best option?:-

1) Take a loan to myself as director.
2) Pay myself a monthly salary and thus pay tax and NI
3) Continue taking dividends (suppose is most tax efficient way)

I am preferring the loan option as I am expecting the loan to bear fruit and will be able to repay in full before personal tax year end 2015 (which means it will be well before the company accounting year end 31/7/15.

I understand that the tax free loan amount is £10,000 – can I pay myself more considering that I will be able to pay it back before April 15.

If it is paid to me and then I repay it back before end of tax year do I need to report this on my self-assessment?

Thanks

[Lambs]

G,

The tax on any salary will initially depend on your PAYE tax code but ultimately - through Self-Assessment - up to the first £10,000 will be tax-free. NI on earnings above the Primary Earnings Threshold - roughly £8,000. The salary comes in at the bottom of your assessable income and 'pushes' more of your dividend income into the Higher Rate Threshold - an effective tax rate of 25% on your net dividend. This assumes you have no income, or benefits in kind, other than your dividends. (You may have a benefit in kind if you take a 'beneficial loan' - see below).

So, taking a salary of £10k will push roughly £10k into your Higher Rate Band - £2,250 on the gross dividend income. (Ignoring the additional NI cost).

Taking further dividends will cost £2,500 for an extra £10,000 net.

Taking a short-term loan is probably the most tax-efficient but:

you must be sure that your company's constitution allows the loan
You must draw up appropriate paperwork

The tax cost can be very small: the current official interest rate is a mere 3.25% per annum. So the notional interest would be only £325 if the loan were left outstanding for a full tax year. The tax thereon would presumably be nil as it would be below your Personal Allowance but, just like salary, it would push a smidge more dividend income into tax at the Higher Rate of 32.5% - an effective rate of just 0.7%. The normal approach is to count the number of complete tax months (6th to the 5th) for which the loan is outstanding. In other words, if the loan were made for just 5 tax months, the personal tax cost would be about £30, with the company owing about £20 in Employers' NIC @ 13.8%.

So, as a short-term measure, a loan can be very cheap. But it must be done carefully. And loans made to participators (broadly, shareholders / loan creditors) which are outstanding more than 9 months after the end of the company's Accounting Period result in a 25% TEMPORARY CT charge on the company - repayable by HMRC when the loan is itself repaid or written off, after a not insignificant delay.

Regards,

Lambs

[robbob]

No PAYE this year so no personal tax and NI paid. I have gone over the min limit by taking dividends only and am now into the 40% tax band.

Note if you do not have other sources of income utilising your personal allowance in the tax year taking 10k salary in replacement for dividends is a normally complete no brainer - you get 2k reduction in corporation tax and the salary is covered by your personal allowance so there is no additional tax due. Obviously if you have already taken divis up to higher rate threshold any salary taken now will have the effect Lambs mentions on your personal tax but Salary will again be better than divis as the corporation tax reduction saved by making the salary payment will ensure this is the better option - Again i am presuming you have not used your personal allowance yet in tis curent tax year.

ref options available (1) 1 is a no brainer if you can repay funds - do note when you go down this route you have to report monies you have borrowed from company if the amounts are still o/s at the accounts year end - not so much as a red flag for hmrc but certainly something that they know there is the potential to reap extra tax from if they ask questions and all the formalities have not been sorted.

There is similar savings possible with regard to the options for vat if you have not thought about that- eg if you have vat registered commercial customers only and are not on flat rate vat - going down this option will likely be beneficial.

I would recommend you engage an accountant as early as you can who will be happy to give you proactive advise in relation to things like this - unfortunately sometimes time is the enemy when you want to make plans to save tax and knowing in advance exactly what to do (as far as possible) is the best solution.