UK Tax Questions? Ask a UK Tax Advisor for answers ASAP
Hi.A company pays corporation tax at 20% on profits up to £300,000. As a director/shareholder, you can take money out in three ways, through salary, through dividend or repayment of money you may have loaned the company personally.If you take salary, it will be subject to PAYE income tax and employee and employer national insurance contributions depending on the level of the salary. The company can claim the salary costs as expense in its accounts so it will save 20% in corporation tax. If you take dividends as a shareholder these are treated as basic rate tax paid and you will only have further tax to pay personally if your total income for the tax year concerned is more than £41,450. Take a look here for information on tax and dividends. In theory, you could take dividends up to £37,305 (grosses up to £41,450) and pay no personal tax so long as you had no other income in the same tax year and your company had undistributed profit of that amount or more. Since a dividend is simply a distribution of profit by the company to its shareholders, it does not reduce the company's profit for corporation tax purpose as salary does.There is no tax to pay on the repayment of monies loaned to the company by the director/shareholder unless interest is charged.Many one or two man companies pay a combination of low salaries to keep the tax and nic charges down and dividend. The higher the profit, the more tax efficient it becomes for higher rate taxpayers. In addition, dividends can be taken as and when needed provided there is profit available so as a director/shareholder you can manipulate when you take income to improve tax efficiency.
Try putting some profit figures into the comparison calculator here to see the difference in tax and nic liabilities on different types of income. I hope this helps but let me know if you have nay further questions.