There are a couple of ways to extract profits from your limited company, through a mix of dividends and salary ...
- Via a salary
If your salary doesn't reach the Income Tax threshold of £12,500 or even the National Insurance threshold of £8,632 then you will have nothing to pay HMRC, but will still have a paid-up NI record for that particular tax year. If you pass the NI threshold, but remain under the Income Tax threshold, then there will be a small amount of NI to pay.
If your limited company has no profits to take dividends from, it makes a lot of sense to take a salary up to the Income Tax threshold to ensure you use up your tax-free allowances.
You can run your payroll monthly, or in one single payment (usually in March). You don't have to pay any money out of the business either, as it can be credited to the individual director's loan account until the cash is available to be drawn out of the limited company.
- Taking dividends
A dividend can be paid to the level of the profit made by the limited company, minus the Corporate Tax. Dividends do not attract NI so it is tax-efficient to take profits as dividends. Remember to retain at least 19% of any profit to cover your Corporation Tax when it's due, so for every £100 in profit, you could tax £81 as a dividend.
Directors commonly take monthly dividends to cover their normal living expenses then look at awarding further dividends at the end of the accounting year. Dividends must have a board resolution and certificate which need to be retained internally rather than filed.
You must be careful to restrain yourself when taking excess dividends. They are taxed at 32.5% until you can prove in the next set of accounts that they have been repaid.
Remember, if you are switching from self-employed to a new limited company, you may not need to take a salary in that first year.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.