Many contractors choose to become directors of their own limited company as it may be more tax efficient than working through an umbrella company. Which could enable them to maximise their take home pay and take advantage of savings that are designed to help limited companies. 

A limited company is an individual legal entity, registered with Companies House, all the money and assets belong to the company as opposed to the owner. This means that you cannot just take money from your business like you would your personal business account. There are specific procedures which need to be followed and any money going in and out of your business bank account must be accounted for.

There are four ways to withdraw money, which include regular payments and one-off transactions. These are:

·        Salary

·        Dividend payments

·        Directors loans

·        Reimbursement of expenses

It is important to understand how each method works and what you need to do to ensure that you are accounting for everything correctly. 

Paying a Salary

The first thing to do when you plan to pay a salary is to ensure that your company is registered as an employer with HM Revenue and Customs.

This will mean that you deduct Income Tax and National Insurance Contributions from salary as well as Employers National Insurance Contributions. These should all be paid directly to HMRC on either a monthly or quarterly basis. Don't worry your accountant will be able to help you.

Salaries are tax-deductible expenses, which come from a company’s profits before Corporation Tax is calculated. This means that the company doesn’t pay tax on the sum, but if the amount is over the personal allowance for personal taxation then the director may incur a personal tax liability.

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Expenses

Expenditure which has been incurred wholly, exclusively and necessarily in the course of doing business can be repaid which out attracting any additional tax. These can include travel, subsistence, telephone and internet costs, professional subscriptions, training, equipment and certain other expenses which are detailed in HMRC guidance.

Paying Dividends

Limited companies can issue dividends at the end of the financial year, and at points throughout the year, which is common when the directors or shareholders rely on the dividends for income. The company directors must declare dividends and a payment date agreed at a board meeting after which, the shareholders should be issued with a dividend certificate. This procedure should be followed fully even if the company only has one director. Many directors choose to pay themselves dividends on top of their salaries. Dividends come out of the company's profits after Corporation Tax liability has been deducted.

On or after 6 April 2016, a £5000 dividend allowance applies to dividend income received by UK resident individual taxpayers; the allowance is set against the first £5000 of dividend income they receive in a tax year irrespective of their marginal rate of tax. On or after 6 April 2016 the dividend allowance is reduced to £2,000. If you pay yourself more than the personal allowance of £11,500 (17/18) and dividend allowance, then you will have to pay tax accordingly, the basic rate (7.5%), higher rate (32.5%) and additional  rate (38.1%). Our take home pay calculator could help you compute your earnings.

Directors Loans

A directors loan can be a tax efficient way to use company money by allowing a director to borrow money from the business or for the business to borrow money from a director. These transactions must take place through the use of a directors loan account. The loan account will maintain a running record of any money moved between the business and its director(s) and show whether the account is in credit at nil balance or overdrawn. 

The tax liabilities concerning loans depend on the balance and the length of time for which the account is overdrawn. If the company owes money to a director, then that sum can be withdrawn at any time without incurring any tax liabilities. All loan activity must be accounted for in the company’s balance sheet, including, where necessary, on the Company Tax Return and the director’s Self Assessment Tax Return

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Keeping your Accounts in Order

For many people, the rules and regulations concerning the management of a limited company's finances can seem complex and impossible to navigate without specialist expertise. Using an accountant who is familiar with the ins and outs of the tax system is the best way to ensure that your business administration is kept up to date and compliant. Running a business can be hard enough without worrying about your bookkeeping and trying to keep track of the various rates of tax that might apply to your income, profits and investments, but an accountant will save you time and money and free you up to focus on your work.

How can Nixon Williams help?

With more than twenty years experience of representing independent professionals such as freelancers, contractors and those trading through limited companies, Nixon Williams’s accountants have plenty of experience in dealing with those who want to operate as tax efficiently as possible.

Having an accountant on hand to answer your questions, liaise with HMRC on your behalf and help you to make the best decisions can make it much easier to run your business and enable you to enjoy peace of mind as well as a secure financial position. For more information on how our fixed-fee packages could help you, call our new business team on 01253 362062 or email: jacqui.fairbrother@nixonwilliams.com.