Taking money from my business - how much and when

[ls0709]

Hi guys,

I've a definite beginner question when it comes to taking money from my business. I'm going to get an accountant to help with it soon but figured I'd ask anyway.

I've been living on nothing whilst getting the business up and running and would really like to start taking a basic salary to live life a bit more normally.

The business currently turns over on average around £12,000 a month. Gross profit is around £6000.

Operational costs, including marketing etc. are around £1000 a month. Leaving £5000.

I'd like to leave around £1500 a month in the business so we can build up money to buy a new van or invest in samples etc in the future.

To my mind that leaves around £3500 left over. There are 2 of us that run the business and we have agreed to be paid the same so that figure would be split between the two of us.

What's the best way to split the £3500 between two people in the most efficient way? Does that seem too much to take out of the business?

 

[Hash and Bash]

Limited Company or a Partnership?
VAT registered?

 

[ls0709]

Limited Company or a Partnership?
VAT registered?

Currently sole trader. In the process of getting set up as ltd and vat registered.

 

[Hash and Bash]

Are you both going to be shareholders in the limited company?
Are you both doing the day to day running of the business?
Do you have other income streams?
Lots of other questions to consider.....

 

[ls0709]

Are you both going to be shareholders in the limited company?
Are you both doing the day to day running of the business?
Do you have other income streams?
Lots of other questions to consider.....

Yes, both going to be shareholders 50/50. Both involved in the day to day of the business so we went with splitting everything down the middle.

No extra income from either of us, it's our full time work.

 

[Somos Accounting]

Indeed a lot of considerations, but to answer based on a generalist approach....

If you're looking at those numbers in your OP also on the basis of running through a Ltd co, then there is no tax consideration.

Assuming you're both directors and that you have no employment contracts in place such that National Minimum Wage wouldn't apply, therefore you can essentially pay yourself what you like in salaries.

A lot of owner managed business would choose to pay a directors salary in line with the Primary Earnings Threshold (£8,424 p/a in 2018/19). At this level there is no employers NIC's, nor employees NIC's. If you have no other income, it would be covered by your Personal Allowance (PA)

As far as the company is concerned, the salary would be further cost and thus would reduce profit and save on Corporation Tax.

Any profit after Corporation Tax could then be distributed as a dividend. These would be taxable personally at 7.5% as basic rate tax payers, once your total income (salary + dividend) exceeds your PA and the dividend allowance (currently £2k p/a).

Certainly working through your situation with a professional to work out what is the best strategy in your particular case would be recommended but hope this helps.

Brett

 

[mattk]

A lot of owner managed business would choose to pay a directors salary in line with the Primary Earnings Threshold (£8,424 p/a in 2018/19). At this level there is no employers NIC's, nor employees NIC's. If you have no other income, it would be covered by your Personal Allowance (PA)

Does paying yourself the bare minimum really attract the beady eye of HMRC or is that just a scare story?

 

[ls0709]

Indeed a lot of considerations, but to answer based on a generalist approach....

If you're looking at those numbers in your OP also on the basis of running through a Ltd co, then there is no tax consideration.

Assuming you're both directors and that you have no employment contracts in place such that National Minimum Wage wouldn't apply, therefore you can essentially pay yourself what you like in salaries.

A lot of owner managed business would choose to pay a directors salary in line with the Primary Earnings Threshold (£8,424 p/a in 2018/19). At this level there is no employers NIC's, nor employees NIC's. If you have no other income, it would be covered by your Personal Allowance (PA)

As far as the company is concerned, the salary would be further cost and thus would reduce profit and save on Corporation Tax.

Any profit after Corporation Tax could then be distributed as a dividend. These would be taxable personally at 7.5% as basic rate tax payers, once your total income (salary + dividend) exceeds your PA and the dividend allowance (currently £2k p/a).

Certainly working through your situation with a professional to work out what is the best strategy in your particular case would be recommended but hope this helps.

Brett

Hi Somos,

Very helpful info there, thanks for that. Just a question and probably me being rubbish with this side of things. Where you say 'no tax consideration' based on turnover in OP what do you mean by that?

The rest of the info has definitely helped break it down so I appreciate you taking the time to help out on that one!

 

[Somos Accounting]

Does paying yourself the bare minimum really attract the beady eye of HMRC or is that just a scare story?

I don't believe HMRC aim to pursue directors paying themselves.

I think the likely challenge would come if one pays a spouse, where they do little or no work at all for the business, or the rate paid is disproportionately high comparative to the work they do.

 

[Somos Accounting]

Hi Somos,

Very helpful info there, thanks for that. Just a question and probably me being rubbish with this side of things. Where you say 'no tax consideration' based on turnover in OP what do you mean by that?

The rest of the info has definitely helped break it down so I appreciate you taking the time to help out on that one!

No problem at all.

In your opening post (OP), assuming you're running those numbers on a Limited company, remember that the company will pay tax (Corporation Tax or "CT") on the profit it makes. To illustrate using your monthly figures:

Turnover £12,000
Expenses (£ 6,000)

Gross Profit £6,000

Admin exps (£1,000)

Net Profit £5,000

CT @ 19% (£ 950)

Profit after tax (£4,050)

Profit after tax is what you could pay in a dividend (share of the profits amongst shareholders) or as you mention, may choose to keep some or all in the company.

Referring to my earlier post, if you paid a salary this would reduce the net profit and the Corporation Tax charge, ultimately reduce profits. But this way you extract from the company more efficiently than simply paying a dividend (either would be free from personal tax with no other income up to £11,850 (2018/19).

Hope this clarifies.

Brett

 

[johndon68]

In your opening post (OP), assuming you're running those numbers on a Limited company, remember that the company will pay tax (Corporation Tax or "CT") on the profit it makes. To

In his second post, the OP said that he is currently a Sole Trader...

 

[MyAccountantOnline]

If you go ahead with the limited company once you've appointed an accountant this will be just the sort of thing they should assist you with. You may also be able to look at rent and possibly directors loan repayments if you invest into the company when it's set up.

 

[ls0709]

No problem at all.

In your opening post (OP), assuming you're running those numbers on a Limited company, remember that the company will pay tax (Corporation Tax or "CT") on the profit it makes. To illustrate using your monthly figures:

Turnover £12,000
Expenses (£ 6,000)

Gross Profit £6,000

Admin exps (£1,000)

Net Profit £5,000

CT @ 19% (£ 950)

Profit after tax (£4,050)

Profit after tax is what you could pay in a dividend (share of the profits amongst shareholders) or as you mention, may choose to keep some or all in the company.

Referring to my earlier post, if you paid a salary this would reduce the net profit and the Corporation Tax charge, ultimately reduce profits. But this way you extract from the company more efficiently than simply paying a dividend (either would be free from personal tax with no other income up to £11,850 (2018/19).

Hope this clarifies.

Brett

Hi Brett,

That does break stuff down really well, thanks for that. Regarding VAT, at what point would we need to consider that and say, from that list of figures where would it need to come off?

Definitely need to get on to an accountant at some point tomorrow!

 

[UKSBD]

Hi Brett,

That does break stuff down really well, thanks for that. Regarding VAT, at what point would we need to consider that and say, from that list of figures where would it need to come off?

Definitely need to get on to an accountant at some point tomorrow!

Be careful, looks like he didn't read that they are your monthly figures and he assumed they were your annual figures

 

[Somos Accounting]

No problem at all.

In your opening post (OP), assuming you're running those numbers on a Limited company, remember that the company will pay tax (Corporation Tax or "CT") on the profit it makes. To illustrate using your monthly figures:

Turnover £12,000
Expenses (£ 6,000)

Gross Profit £6,000

Admin exps (£1,000)

Net Profit £5,000

CT @ 19% (£ 950)

Profit after tax (£4,050)

Profit after tax is what you could pay in a dividend (share of the profits amongst shareholders) or as you mention, may choose to keep some or all in the company.

Referring to my earlier post, if you paid a salary this would reduce the net profit and the Corporation Tax charge, ultimately reduce profits. But this way you extract from the company more efficiently than simply paying a dividend (either would be free from personal tax with no other income up to £11,850 (2018/19).

Hope this clarifies.

Brett

Be careful, looks like he didn't read that they are your monthly figures and he assumed they were your annual figures

Indeed I mentioned the illustration was based on the monthly figures.

 

[Somos Accounting]

Hi Brett,

That does break stuff down really well, thanks for that. Regarding VAT, at what point would we need to consider that and say, from that list of figures where would it need to come off?

Definitely need to get on to an accountant at some point tomorrow!

The current VAT registration threshold is £85,000.

VAT is charged on top of your sales so it wouldn't change, but would increase your prices. If your customer(s) aren't VAT registered themselves then that may cause a problem.

If some of your costs are VAT inclusive, then the VAT incurred can be reclaimed which would reduce you overall cost.