When you are contracting through your own Limited Company, it can be tempting to withdraw all of the funds that are available to you after tax in the form of dividends.
While this may help improve your own personal cash flow, if you don’t need to spend this money personally it may mean that some of your earnings end up in the hands of the taxman unnecessarily.
When considering the most tax efficient method of profit extraction from within your company there are three basic tax planning techniques that everybody should take into account:
1. Retaining Profit
Unless funds within the company are required for personal expenditure, it is not of course necessary for them all to be withdrawn.
When funds are withdrawn from your company in the form of dividends and you have exceeded the higher rate tax threshold, you will pay income tax personally on these dividends at an effective rate of 25%.
You may wish to consider only declaring dividends up to the higher rate tax threshold where income tax is payable, and leaving the surplus funds within the company as retained profits.
Dividends can be taken from retained profit whenever you choose, perhaps at a time when you are not working or you may wish to retain profit within your company over a long period of time to help save for your retirement.
2. Pension Contributions
Making pension contributions can be an extremely tax efficient method of utilising company funds. You are able to make pension contributions both personally and through the company which, depending on your level of earnings, will help you to save tax.
You can make personal pension contributions up to the level of your salary. You receive tax relief on personal pension contributions through your tax return as your basic rate band increases by the gross amount you have contributed to your pension.
If you choose to make a personal pension contribution rather than take funds as dividends, you can receive tax relief up to 42.5%.
If you wish to make pension contributions at a level greater than your annual salary, you may wish to make these contributions through the company. Company contributions are made gross and will reduce your business profits which in turn reduce your corporation tax bill.
If you choose to make company pension contributions rather than take funds as dividends, you can receive tax relief up to 40%.
3. Splitting shares with your spouse
If your spouse has no earnings it may be possible to effectively double your tax free earnings by gifting them 50% of the shares in your company.
Even where your spouse has other earnings it is possible to fragment the shareholding within your company to enable them to receive tax free dividends.
You should note however, to successfully split your dividend income with your spouse it is essential that proper ownership of shares in the company is handed over. This means that your spouse or partner has full control of any funds paid to them in the form of dividends.
These three basic tax planning techniques will help you to extract profits from your company in a more tax efficient manner, however this list is far from exhaustive when it comes to tax planning.
We would also recommend that you speak with a Financial Adviser to discuss wealth management and also ensure you have the correct level of cover in place.
If you would like Simplyco to refer you to a Financial Adviser who is regulated by the FCA for a free consultation please send us a message or give us a call and we will be happy to help.
Simplyco are expert contractor accountants and try to give their clients straightforward, honest advice to help them with their careers. To learn more about the services we provide, please give us a call on 01900 898 440 or email email@example.com.
Comments are closed.