Full Time Employment + Paying Myself from Limited Company

[Saladin]

Hi,

I've recently incorporated a limited company where I'll be manufacturing and selling products online.

I have a question about the finances and how best to extract money from the limited company (once it has some to be extracted). So, I have a full-time job where I am taxed at the basic rate (20%) and I have a somewhat okay understanding of how dividends and salaries work but unsure what would be the most tax-efficient way to do so here. So the numbers:

Income from full-time job: £38,000
--
Projections (numbers have been rounded to nearest 10K for simplicity):
Annual Revenue: circa £60,000
Gross Profit: circa £50,000
Net Profit: circa £40,000

I would want to leave about 50% of the money in the business for growth but want to figure out the best way to draw the rest of the money. If it matters, right now I'm not interested in pensions contributions (I will be just not yet).

I understand that the best way to do is probably utilising dividends here but is there any benefit of drawing down a salary to max my basic tax rate; pull £12,000 as a salary to bring me to £50,000 annual salary and then the remaining as dividends?

Thanks in advance!

 

[Joyous]

I have a question about the finances and how best to extract money from the limited company (once it has some to be extracted). So, I have a full-time job where I am taxed at the basic rate (20%) and I have a somewhat okay understanding of how dividends and salaries work but unsure what would be the most tax-efficient way to do so here. So the numbers:

Income from full-time job: £38,000
--
Projections (numbers have been rounded to nearest 10K for simplicity):
Annual Revenue: circa £60,000
Gross Profit: circa £50,000
Net Profit: circa £40,000

I would want to leave about 50% of the money in the business for growth but want to figure out the best way to draw the rest of the money. If it matters, right now I'm not interested in pensions contributions (I will be just not yet).

I understand that the best way to do is probably utilising dividends here but is there any benefit of drawing down a salary to max my basic tax rate; pull £12,000 as a salary to bring me to £50,000 annual salary and then the remaining as dividends?

Thanks in advance!

Your personal allowance is already used up by your full time employment. Based on the info you've given, there's no benefit in taking further salary from your company. Better to use up the basic rate band with dividends where they'll be taxed at 8.75% as opposed to 33.75% at the higher rate.

 

[Saladin]

Your personal allowance is already used up by your full time employment. Based on the info you've given, there's no benefit in taking further salary from your company. Better to use up the basic rate band with dividends where they'll be taxed at 8.75% as opposed to 33.75% at the higher rate.

From my maths, that I'm sure are completely wrong, it appears that that if I take £12,000 as a salary I should be about £1000 better off...

Maths suggest:

If 12,000 as salary:
I'll save £2400 in CT but I'll be paying about £5000 in income tax/NI
Total cost in tax: £2600

If £12,000 as dividends:
CT will be £2400 higher + £1000 in dividend tax
Total cost in tax: £3400

Have I gone wrong somewhere?

 

[DWS]

Not sure I agree with Joyous, I would be looking at taking a salary up to the Employer N/I threshold of £9,100 that way it counts as an expense for the Company and only taxed at 20%, taking dividends would mean 19% C/Tax as well as paying 8.75% Dividend tax.

 

[Saladin]

Not sure I agree with Joyous, I would be looking at taking a salary up to the Employer N/I threshold of £9,100 that way it counts as an expense for the Company and only taxed at 20%, taking dividends would mean 19% C/Tax as well as paying 8.75% Dividend tax.

Okay, interesting so this aligns with my maths above your post! But why 9100 and not more? This has something to do with NI contributions right?

 

[DWS]

Okay, interesting so this aligns with my maths above your post! But why 9100 and not more? This has something to do with NI contributions right?

Once you earn more than £9,100 then the Company needs to pay Employers N/Insurance, I think it is still 13.8%

 

[Saladin]

Once you earn more than £9,100 then the Company needs to pay Employers N/Insurance, I think it is still 13.8%

So if I was to take my initial suggested £12,000 then that would cost the business about £400 in NI.

It would cost me personally £2400 in tax + £1400 in NI (£3800) including a further £1100 in student finance payments, totalling £4900 as I originally suspected.

 

[DWS]

So if I was to take my initial suggested £12,000 then that would cost the business about £400 in NI.

It would cost me personally £2400 in tax + £1400 in NI (£3800) including a further £1100 in student finance payments, totalling £4900 as I originally suspected.

You shouldn’t have to pay N/Insurance personally if you only take £12k

 

[Saladin]

You shouldn’t have to pay N/Insurance personally if you only take £12k

But my understanding is that my total renumeration would be £50,000 from my salaried full-time job (£38K) and salary from business (£12K) so therefore I'd be paying NI on the 12K too...

 

[Bobbo]

But my understanding is that my total renumeration would be £50,000 from my salaried full-time job (£38K) and salary from business (£12K) so therefore I'd be paying NI on the 12K too...

NI is calculated on a job-by-job basis - unless the employers are sufficiently connected (my phrasing, not the wording of the rules) for the aggregation rules to come into play.

 

[Saladin]

NI is calculated on a job-by-job basis - unless the employers are sufficiently connected (my phrasing, not the wording of the rules) for the aggregation rules to come into play.

Okay brilliant. Thanks. Looks like the way to go is to draw down 12,000ish in salary to max out the basic tax rate and then pull down remainder as dividends

 

[UK Contractor Accountant]

Dividend route will give you more cash in your hand.

12K salary = £9600 take home ( tax 12K x 20%)
12K dividend = £11000 take home (div tax 8.75% x £11,500)

 

[MyAccountantOnline]

From my maths, that I'm sure are completely wrong, it appears that that if I take £12,000 as a salary I should be about £1000 better off...

Maths suggest:

If 12,000 as salary:
I'll save £2400 in CT but I'll be paying about £5000 in income tax/NI
Total cost in tax: £2600

If £12,000 as dividends:
CT will be £2400 higher + £1000 in dividend tax
Total cost in tax: £3400

Have I gone wrong somewhere?

If your company pays you a salary of £12,000 (ignoring any National Insurance) it'll save £2,280 in Corporation tax. Based on your projections your company will be paying the small profits rate of 19% not 20% which is the Income tax rate.

With some significant potential savings you'd really be best getting advice directly from an accountant who has all relevant information.

 

[MyAccountantOnline]

Once you earn more than £9,100 then the Company needs to pay Employers N/Insurance, I think it is still 13.8%

But bear in mind the CT saving of paying 13.8% employers NI is atleast 19% Corporation tax.

 

[Saladin]

Dividend route will give you more cash in your hand.

12K salary = £9600 take home ( tax 12K x 20%)
12K dividend = £11000 take home (div tax 8.75% x £11,500)

Right, but the saving in CT of £2280 (as @MyAccountantOnline mentions above) suggests that the most tax efficient way would be to take it as a salary. BUT it seems that any dividends I then want to take would be taxed at 33.75%...

According to gorilla accounting's calculator on their website (their salary + dividend one) it seems the best way too extract £20,000 from the business would be to take it all as a dividend. That would leave me £2500 better off...

 

[Saladin]

Your personal allowance is already used up by your full time employment. Based on the info you've given, there's no benefit in taking further salary from your company. Better to use up the basic rate band with dividends where they'll be taxed at 8.75% as opposed to 33.75% at the higher rate.

Okay Joyous, as you can see from the above post it seems like I've come around to your way of thinking, my unknown internet friend. Thanks!!

 

[DWS]

Right, but the saving in CT of £2280 (as @MyAccountantOnline mentions above) suggests that the most tax efficient way would be to take it as a salary. BUT it seems that any dividends I then want to take would be taxed at 33.75%...

According to gorilla accounting's calculator on their website (their salary + dividend one) it seems the best way too extract £20,000 from the business would be to take it all as a dividend. That would leave me £2500 better off...

But does that take into consideration the C/Tax saving?
Also if you are putting salary in as £50k then the figures will be incorrect because this will derive from 2 employments not 1

 

[MyAccountantOnline]

Right, but the saving in CT of £2280 (as @MyAccountantOnline mentions above) suggests that the most tax efficient way would be to take it as a salary. BUT it seems that any dividends I then want to take would be taxed at 33.75%...

According to gorilla accounting's calculator on their website (their salary + dividend one) it seems the best way too extract £20,000 from the business would be to take it all as a dividend. That would leave me £2500 better off...

My post was to point out your error in calculating Corporation tax.

My advice is to get proper specific advice from an accountant who has all relevant information.

 

[Saladin]

But does that take into consideration the C/Tax saving?
Also if you are putting salary in as £50k then the figures will be incorrect because this will derive from 2 employments not 1

Yeah you're right - I think I've been able to work out difference between the C/T saving plus both routes and it seems to be about £100 difference... HOWEVER you were also right about the salary as 50K - as the second job doesn't incur the NI, therefore it's working out to be about £1500 (or so) better off to be paid via £12000 salary and £8000 in dividends...

 

[Saladin]

My post was to point out your error in calculating Corporation tax.

My advice is to get proper specific advice from an accountant who has all relevant information.

Oh appreciate that! I'm not trading yet - this is all based on projections at the moment. I was just curious if once money starts coming in if I should take a salary from the off or if I should wait. Ideally I'll be able to take a salary straight away. And it seems I should be able to do that tax-efficiently. Thanks for your help

 

[DontAsk]

If you delay taking a salary and take a greater amount, lets say double after 6 months, you may end up paying NI as that is levied on each salary payment. Tax will be the same, as it's an annual calculation.

 

[Deleted member 356896]

Hi.

I’m in a similar position.

However I’m currently a higher rate tax payer in my day job.

Is dividends still the best option?

Company expected to make over £100k this year.

I’ve historically left the money in the company with the plan to draw down a salary when I eventually quit the day job.

 

[Bobbo]

If you delay taking a salary and take a greater amount, lets say double after 6 months, you may end up paying NI as that is levied on each salary payment. Tax will be the same, as it's an annual calculation.

Though directors' NI (presuming OP would be a director of this company) is by default on an annual basis too.

 

[DontAsk]

Though directors' NI (presuming OP would be a director of this company) is by default on an annual basis too.

If he's thinking of taking a salary then he must be an employee. Is it normal to pay yourself as both?

 

[cjd]

1. Get yourself an accountant now, you're going to need one anyway.
2. After s/he's explained the best way of dealing with your profit s/he'll probably also explain how a Net Profit on Turnover of 66% is highly unlikely ;-)

 

[GraemeL]

If these numbers are right

Projections (numbers have been rounded to nearest 10K for simplicity):
Annual Revenue: circa £60,000
Gross Profit: circa £50,000
Net Profit: circa £40,000

I would be packing in my salaried job and focusing on doubling the sales to make £80k net profit.
But then I don't believe these projections can be right.

 

[Saladin]

Though directors' NI (presuming OP would be a director of this company) is by default on an annual basis too.

I am the sole director, yes! Thanks for the guidance on the NI stuff. My aim is to spread out the salary before the second half of the year. So that shouldn’t be an issue.

 

[Saladin]

1. Get yourself an accountant now, you're going to need one anyway.
2. After s/he's explained the best way of dealing with your profit s/he'll probably also explain how a Net Profit on Turnover of 66% is highly unlikely ;-)

If these numbers are right

I would be packing in my salaried job and focusing on doubling the sales to make £80k net profit.
But then I don't believe these projections can be right.

Hi both! Im sure there’s elements I’ve probably failed to include here. But two main things I’m not shelling out for (at the moment, though this may of course change!) are premises and labour. All items will be manufactured by me and shipped (I’ve accounted for shipping too) from my home. Though now that I’ve said this out loud, I need to figure out how to handle returns!!

Now I’m sure my projections are probably quite generous and perhaps I’ll adjust these before starting trading and throughout the year. But at least in the first year of trading I do not foresee growing to need a business premises (I have a separated registered address) or labour costs (well apart from my own salary that we currently discussing).

Is there anything you think I’m potentially not accounting for?

Edit: also just to add these numbers I provided were rounded to the nearest 10,000 so the profit margin you’ve calculated isn’t quite accurate and the actual number I’m projecting is lower - but not too much lower than what you’ve worked out

 

[cjd]

Missing:

1. your labour is not 'free'
2. fees to accountants, liability insurance, heating lighting
3. website creation and maintenance
4. marketing and advertising materials
5. <cough> telephone and internet
6. returns and wastage
7. card payment and banking fees
8. bookkeeping software

and a pile more that I'm sure others will list for you

 

[Saladin]

Missing:

1. your labour is not 'free'
2. fees to accountants, liability insurance, heating lighting
3. website creation and maintenance
4. marketing and advertising materials
5. <cough> telephone and internet
6. returns and wastage
7. card payment and banking fees
8. bookkeeping software

and a pile more that I'm sure others will list for you

Well yes, my labour is what is at discussion in this thread. If I take a salary, that brings that net profit right down…

Yes fair point on 2. As for 3, that’s been accounted for. 4, that’s been budgeted for too. I’m a marketer by trade so I have a fair bit of experience there. 5, as I’m working from home, that’s nothing extra. 6, absolutely right there, that hasn’t been accounted for. 7 is in the books, so accounted for. And 8, I get free with my bank, so no need to budget for that.

Appreciate the nudge to include 2 and 6 in my numbers, thanks so much buddy!