After working hard to grow your recruitment business, here’s how to legally withdraw money from it and minimise your tax bill.
Running a recruitment firm can be tough work so it seems only fair that you can access money from the business as and when you need it, right? Wrong. If you’re set up as a limited company then it’s vital you understand the separation between you and the business and what this means for your finances and tax liabilities.
Once incorporated at Companies House, a limited company becomes a separate entity to you, the owner, and so any money the company makes belongs to the company. Of course, that’s not to say you can’t access it. You just have to know how to do it legally, fairly and in the most tax efficient way.
There are three common ways business owners withdraw money from their business: Director’s salary, Dividends and Director’s loan. A dedicated accountant will be able to work with you to determine the right combination of these three that will work for you and your company as well as considering pensions, benefits (including a company car) and alternative investments. But it never hurts to understand the basics.
This first one is fairly self-explanatory, you pay yourself a salary. For this, you’ll need to be registered as an employee of your company and go through the PAYE system.
Crucially, the amount you pay yourself can help keep your tax bill low – remember as a company director you’re obliged to prepare a self-assessment tax return. Setting your salary at a level that means you can minimise your tax obligations will help ensure you get to keep more of your hard-earned money.
You can choose to take a salary up to the National Insurance Contributions (NIC) threshold, which for the year 2021-2022 stands at £9,568 per year or £797 per month. Using this method you’ll remain eligible for the state pension, but no income tax or NIC will need to be paid. This is providing you have not received a salary from other employment (or previous employment) in the given tax year.
Next, you’ll want to look at how you can top up your salary and paying a dividend is one way to do this providing you have shares within the company.
Each year you’re entitled to a dividend allowance (tax free) – for 2021-2022 the allowance is £2,000 per year. After this amount, the tax you pay is dependent on your income tax band. Your tax band is calculated by taking into account all of your income, minus your personal allowance.
For 2021-2022 the tax rate for dividends over the £2,000 allowance is as follows:
Basic rate taxpayer: 7.5%
Higher rate taxpayer: 32.5%
Additional rate: 38.1%
From April 2022 the tax on dividend income is increasing by 1.25% in order to support the NHS and social care.
It’s also worth noting that you can only pay dividends when the company has made a profit. This can be in the current year or an accumulation of previous years’ profit.
A third common way of drawing money from your business is through a director’s loan. Any such transactions must be accounted for in both the company’s balance sheet and possibly its tax return, as well as sometimes on the director’s self-assessment tax return.
Usually the loan originates from a director putting money into the business or paying for some of the business expenses personally. Loan repayments are tax free, however we recommend utilising your allowances first before making any loan repayments.
As a rough rule of thumb if your director’s loan account is ‘overdrawn’ – that is the director has withdrawn more than they have paid into the company – they won’t have to pay tax on it provided the amount is repaid within nine months and a day of the company’s year-end. After this, the unpaid balance will be subject to S455 tax – corporation tax at 32.5%. It is possible to then reclaim this tax once the director’s loan is paid in full.
If you take a director’s loan of £10,000 or more then it must be reported on your tax return and you may be required to pay National Insurance and interest on it.
The amount of interest paid on the loan is down to the company to determine – but do be aware that if it is below the official rate of interest HMRC may treat it as a ‘benefit in kind’ and so it would need to be recorded on your self-assessment return.
At Recruitment Accountants we’re here to help ensure you are tax efficient as well as compliant and that your recruitment business prospers. We will advise you on the best and most tax efficient way of drawing funds from your business. Speak to us today to find out more.