It’s one thing to have a successful business that is making money, but how would you go about taking your profit so that you can use the money for personal expenses or investments?
With a sole trader business it’s easy, as you are the one earning the money it is yours to spend how you wish, providing you take care to save some in order to pay any tax due.
When you have a limited company things get more complicated. A limited company is treated as a separate entity in the eyes of the law. This means that drawing money from it will be taxed as personal income. A popular method of doing this is to pay yourself a wage from the business as if you were an employee.
The main advantage of this method is that you can put the wage down as an expense to the company, reducing its profits therefore reducing corporation tax. The other advantages are that you can use your personal tax and National Insurance Contribution (NIC) free allowances resulting in an amount of money you can draw without paying any tax on it. You can also use this method to pay some NICs by paying yourself a little over the limit which is used to calculate state pension and other benefits.
The main disadvantage of paying yourself a wage is that when you go over your tax free allowances, the amount of tax you would pay on the wages soon adds up, which means you could be paying a large amount of personal tax and NICs in addition to your corporate tax. This personal tax would be paid out by the company rather than your own pocket though. In addition, if you do not already have a payroll system in place you will need to set one up and be prepared for Real Time Information filing which can be a time consuming task.
If you would like more advice or information regarding the above, or with setting up a payroll, please do not hesitate to contact us.