November 02, 2020

Article

All profit generated by a company belongs to it and should not be taken by the director/ shareholder as their own money in the same way that a partner might in a partnership. While it is possible to borrow money from a company, this can lead to extra tax being paid by the company.

Directors are often paid a salary; however, this can be tax inefficient, see the example below. Therefore, whilst you should pay a salary, the most tax efficient method is to pay one that allows qualifying years for national insurance, without having to pay any national insurance. This was previously an easy amount to set, however, following the changes in the budget, the rate an employer and employee start paying national insurance have become misaligned. In the examples I have assumed there is sufficient employment allowance, so the tax efficient salary is £9,500.

Tax efficient remuneration has for numerous years worked on a basis of this basic salary and dividends to provide the level of income that is required. While for lots of businesses this may well be the case, for farmers this is not always so.

If you either own substantial farmland personally, or the company owes you money, which could easily be the case if you have incorporated recently, then there are even more tax efficient options available. I will only look at interest as this provides the best tax savings.

If you have personally loaned the company money or recently incorporated and have a directors loan account, this is money you can withdraw tax free. Whilst it is possible to draw down these funds and not take any remuneration from the company, this can only go on so long. It is possible to top this loan up in a tax efficient way each year.

Example

In this example, I compare a director who takes the tax efficient salary and dividends to utilise their basic rate band with one that also takes interest on his loan account. In this case, the director has a loan to the company of

£350,000. They have no other income. The company has profits of £100,000 each year. For comparison I have also included the cost of taking just a salary.

Salary, Interest, Dividend Cost of Tax Table

This saving arises because the interest paid by the company is tax deductible for the company. Also as individuals, it is possible to receive some of this money tax free if your first £5,000 of income is interest. Whereas, dividends are not tax deductible in the company. Further considerations should include the effect of the extra expense on the business and the fact that withholding tax needs to be paid to HMRC and the interest reported to HMRC. This withholding tax is then reclaimed on the individuals tax returns.

Where all income is derived from your personal company and you have loans to the company, charging the company interest should be an option that is considered to reduce the total tax liabilities for all involved.

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