I am regularly asked by business owners how they should pay themselves. See below the various ways that you can pay yourself as a business owner and their pros and cons.
- Not restricted by retained earnings (like dividends are).
- Income tax deducted at source and so no immediate requirement to file a self-assessment tax return.
- Gross wages and employers national insurance/pension contributions are deductible for corporation tax
- Requires processing through a payroll scheme which can involve payroll operator costs.
- Liable to higher rates of income tax when compared to other remuneration methods.
- Potentially liable to class 1 national insurance.
- Tax free dividend allowance of £2,000 available.
- Taxed at a lower rate than salary.
- Not liable to class 1 national insurance.
- Doesn’t require a company payroll scheme to be in operation.
- More control over personal earnings.
- Cannot exceed company retained profits held and so might not be an option for loss making/new businesses with low reserves.
- Only available to company shareholders.
- Tax on dividends is not deducted at source and would need to be reported on a self-assessment tax return.
Private pension contributions
- £40,000 annual limit available which can be carried forward for three years.
- Pension contributions made are a corporation tax deductible expense.
- There is no income tax owed on any contributions made.
- As with any pension, you cannot draw this money until pension age without incurring a tax charge.
- Reduces company cashflow based on amounts being contributed.
New electric company car
- Benefit in kind liability is only 1% of list price in 2021/22 rising to 2% in future years.
- Company receives capital allowance deductions on the purchase of the vehicle.
- Other costs associated with running the vehicle (repairs etc.) are also allowable for corporation tax.
- Only available on brand new electric cars (not second hand)
- There are not a lot of new electric cars available, and these can be expensive.
- There is still a requirement to file a P11D each year which incurs both national insurance and operating costs
Other benefits in kind
- Cost of benefits provided deductible for corporation tax.
- Allows staff to have access to better services that would not be affordable when paid privately (health insurance policies etc.)
- Some benefits such as a work mobile phone are tax free.
- Benefits liable to class 1a national insurance.
- Any benefits received would need to be reported on a P11D form.
- The value of the benefit will form part of your taxable income for the relevant tax year, taxed either through PAYE or Self-assessment.
If you would like to discuss your position in more detail, please contact me using the link below.
Author: Sam Baldwin, Business Services Assistant Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site
Date published: 29 April 2021