Own the shares in the company you work in? All the different taxes can be tricky to keep track off. Here’s a brief overview of the primary sources of income and the tax they attract.
The company is its own legal entity
The first thing to understand is that any income/profit made by the company is owned by the company. As such it attracts company tax which is known as corporation tax. Those profits are completely separate from you until they leave the company and are passed to you as the owner/employer
Corporation tax is a tax on the profits of the company. In its simplest form, it is the income less the allowable expenses of the company and is a percentage of what is left over.
Payment of this tax is made by the company as is due 9 months and 1 day after the year end of the company.
Income for the owner/manager
As an individual you draw income from the business. This is how you get the profits in the company into your pocket (well probably your personal bank account really!). As both an employee of the business (usually as a director) and the shareholder of the business you have 2 sources of getting at the company’s profits.
You can take a salary through payroll from your company – Much in the same way you got paid when working for someone else. This is subject to the normal PAYE and NIC deductions. However, the cost of the payroll is an allowable expense for the company. As mentioned above, Corporation tax is charged on income less allowable expenses so the profit will be less the salary (plus Employers NIC) so the companies tax bill will be reduced accordingly.
PAYE and NIC is taxed at source and is paid monthly (in the month after the payroll) as part of the payroll run (there are special rules for small amounts due that can be paid quarterly).
Alternatively, the 2nd source is via dividends. Dividends are paid out of the remaining balance after the company has paid all its expenses and all its tax (or after any liabilities that are due to be paid). This is known as the retained profit and the company can distribute this to you by way of a dividend.
In the tax year 2016-2017 HMRC introduced a new tax called the dividend tax. This is a new tax charge on the individual on any dividend income after a yearly allowance that is tax free.
This is paid via the self assessment return which is due by the 31st January every year.
To recap : there are 3 taxes to be aware of
The company pays corporation tax on each year’s profits Payable 9 months and 1 day after the company year end
Payroll – PAYE NIC – The Company pays any PAYE or NIC due on its payroll monthly
Dividend tax – The individual pays this personally on their Dividends payable by the 31st January after the personal tax year.
Knowing what taxes to pay and when they need to be paid by is vital for the success of any business and forward planning. But also, knowing what is the best mix of drawing funds and how to administer the drawings can help with limiting your tax payments as well as avoiding any nasty surprise tax bills.
How can we help?
Holmes and Company can help you take the right decisions on how to withdraw funds, assist with administration of this as well as calculating the tax due so you know exactly where you are with your taxes.