A look at the most tax-efficient options
When you run a limited company, you can pay yourself with a salary or take an income in the form of dividends – or a mixture of both. We reveal the most tax-efficient options for business owners to take drawings from the business - but if your finances are complicated you should always seek professional advice
'Drawings' are any money you take from the business to cover your personal living expenses. Drawings are also referred to as salary or wages.
As a start-up or small business, you should avoid taking more money from the business than it can afford. You may need to rely on savings until the business is more established and has a steady, positive cash flow.
Make a list of all your regular expenditure and then add to that an amount to cover one-off costs that you only spend now and then. Be realistic with your estimates - don't be tempted to underestimate your living costs just to make your cash flow work!
The following calculations are based on rates and thresholds in England, Wales and Northern Ireland for the tax year 2023/24. Different income tax rates apply in Scotland.
From 6 April 2023 to 5 April 2024 you can pay a total of £12,570 (£241.73 per week) without attracting any personal income tax or employee’s National Insurance. The company will pay employers NI contributions at 13.8% on salary over £9,100, but it saves corporation tax on the whole salary (including employers NI).
At this level of salary, you get National Insurance Credits towards some benefits eg state pension. You will have to comply with certain rules and regulations:
The tax-free dividend allowance was introduced in April 2016. The allowance for 2023/24 is £1,000. Any dividends in excess of this allowance attract dividend tax. The rate of dividend tax depends on your total income.
Dividends now attract tax at the following rates:
The total tax-free amount is £13,570 (£12,570 salary plus £1,000 dividends).
Note: this is per person (you could consider a spouse taking an income or some dividends from the business, especially if they do not work elsewhere, but always get advice from an accountant first).
If you want to take an income over £50,271, dividend income will attract a higher tax rate (33.75%. And if your income exceeds £100,000 your personal allowance will be restricted. You should then take further advice.
If you were to take all £50,000 as salary, the tax calculation would be very different.
You would pay much more income tax and also significant employees National Insurance contributions:
However, the company would pay less tax. Although the company will pay employers NI contributions at 13.8% on salary over £9,100, the company saves corporation tax on the whole salary (including employers NI). The company’s total tax contribution falls - but by much less than the increase in your personal taxes.
The overall effect is to dramatically increase your total tax bill (taking into account income tax, corporation tax and NI contributions).
Unless you are already required to submit a tax self-assessment return, you do not need to do so just for dividends below £10,000. You can pay the tax due by contacting HMRC and asking for a change to your tax code. You don't need to do anything if your dividends are within your dividend allowance.
If you already submit a self-assessment tax return, or if your dividends are above £10,000, simply enter the dividend amount on your self-assessment tax return.
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Download ACCA’s latest tax rates and allowances tables from our Budget Hub.