How to get a return from an SME
There are typically three main relationships you have with your business: as a lender, an employee, and an owner/shareholder.
Taking these into account, here is how you can draw money from the business based on the relationship mentioned above in a tax efficient manner:
Employee of your business
Salary
Working for your business makes you an employee and you can earn an employee’s salary. Keeping the salary low can help to keep the tax costs to you and your business at a minimum.
For instance, by capping your salary to that the of National Insurance (NI) threshold
The advantage: salary is a tax deductible cost to a business this will reduce your corporation tax and under the £10,000 you will not pay personal tax.
Reimbursable Expenses
If you have expenses in your business which you pay personally. As long as the expenses were exclusively for business, you may claim them back from the business.
The advantage: as long as expenses are allowable there will be no personal tax liability and you will get reduction in corporation tax.
Lender to your business
Director’s Loan
If you have lent money to the business for any reason then this is considered a loan like any other loan, and as such it’s payable back to you.
The advantage: the cash you will receive personally as a loan repayment is not subject to personal tax.
Shareowner
Dividends
A company will pay 20% corporation tax on profits. The profit-after-tax is then available to distribute to its shareholders. This is known as dividends.
If you pay yourself a dividend, up to the basic rate income level [the 2014/15 basic rate at 20% is £31,865], you will not have to pay additional personal taxes.
Once your gross personal income goes over the basic income threshold, the tax rates for dividend income also go up.
The advantage: dividends give businesses the flexibility of keeping salary costs low and paying shareholders after earning actual profits, allowing owners to earn in the most tax-efficient way.
Capital Gains
Capital gains occur when, as a shareholder, you sell your shares to someone at higher than cost value.
The capital gains tax rate starts from 18% [2014/15 Gains to Basic rate Limit 18%, Gains above basic rate 28%]. However, there is an annual exemption available for the first £11,000 [2014/15 individual allowance]. Also, if you qualify for Entrepreneur’s Relief you will only have to pay 10% capital gains tax.
The benefit: tax liability is lower than income tax.
Conclusion:
As a SME Small Medium sized enterprise business owner, you have many options to get returns from your own company. HMRC rules can be multifaceted and the rates and allowances often alter each year. An accountant or a financial advisor can help you decide between options, to ensure that your decisions reflect the choice most economical and advantageous to your business
