Newsletter - Cash is King & more
At the moment cash is king, borrowing is difficult and expensive, be cautious, have a plan and stick to it.
It may not be a recession but it is definitely tough. With the anniversary of invasion of Ukraine, interest rates at 4% and inflation still high and in your costs, prepare your next price increase now.
Company pension to reduce corporation Tax
As a Director the most efficient way to reduce your corporation tax liability is to pay up to £40,000 a year into your pension fund. The payment is 100% tax deductible and up to 25% is tax free to you on withdrawal, if you are over 55. There are limits of course and it has to be paid before 5th April.
Taking money out of your company and income Tax
Owner/directors typically set up an annual income to maximise tax efficiency which means a low salary and the balance as dividends. Dividends drawn by a director are subject to income tax, payable by the individual not the company.
It is important to monitor the level of dividends drawn throughout the year for two reasons.
Firstly, there must be sufficient distributable reserves (essentially past profits) in the company to allow the the dividend to be paid. If an owner/director takes out more dividend than available reserves this creates a directors loan. If the loan is more than £10,000, it is a benefit-inkind.
If not repaid within 9 months of the year end, there is a tax liability of 33.75% of the balance as part of the annual Corporation Tax charge. The payment is recoverable only after the loan is repaid.
Secondly, income tax will arise from the dividends taken during the tax year. Where income exceeds £50,270 additional dividends are taxed at 33.75% until you reach £150,000 after which it is 39.35%. Income above £100,000 you start to lose your personal allowance of £12,570, as it tapers to zero at £125,140.