Salary
Directors can take a salary which is tax deductible for the company, and chargeable on the director by way of income tax. We advise many of our clients to take a ‘tax efficient’ salary (for the 2020/21 tax year this is £9,500 in most situations), which means that neither the company nor the director need to pay any national insurance. The director also doesn’t pay any income tax on this amount as it is below the personal allowance of £12,500.
Dividends
As the company makes a profit after tax, the reserves in the company will increase; any loss would reduce this figure. The amount in the reserves can be distributed to directors and shareholders by way of dividends. As a dividend is distributed, the company reserves figure reduces. Dividends are a popular way of extracting money from a Company as they are taxed at 7.5% up to the basic rate band (£37,500 for 2020/21) and 32.5% in higher rate (£37,501-£150,000) – and not subject to National Insurance. Dividends must be declared at a payment date agreed, with a dividend voucher and minute issued and they cannot be backdated.
Rent charged to company
Where farmland is owned outside of the business, the owners of that land can charge the company a rent. This is a tax-deductible expense for the company, but taxable income on the owners (but no National Insurance charge). If the owner had a (bank) loan in place personally that financed the land, the interest on the loan can be offset against the rental income from the company for income tax purposes.
Directors Loan Accounts (DLA)
There are many misconceptions when it comes to the DLA. The DLA represents the amount of money that either the company owes you as a director or you as a director owe the company. Ideally, the company should be owing the money rather than vice versa as this would result in a harsh (“S455”) Corporation Tax charge.
Any salary and dividends issued or rent charged do not physically need to be paid by the company to the directors/shareholders. These amounts can be reflected in the DLA rather than in the company bank account. The salary and dividends issued but not physically drawn as cash will increase the DLA balance. Any money drawn – for example, where the limited company bank account is used to pay for some private items or transfers of money are made to the director - reduces the DLA balance. As long as the company profits allow, most shareholders would be well advised to use up any spare basic rate income tax band in dividend payments each year – to secure the ability to take that money out in a tax efficient manner at some point in the future.
As a director you are likely to use your own vehicle for business use. Whilst you have to pay for your fuel, vehicle repairs, etc. personally, you can charge the company for business mileage (at 45 pence per mile for the first 10,000 miles each year and 25p thereafter) - this is tax deductible for the company and tax free for the director. This mileage charge boosts the DLA balance if not physically paid.
A word of caution about DLAs, though, is that they are not relievable for Inheritance Tax purposes – and as such if the balance becomes high, it would be advisable to convert the balance to “Redeemable Preference Shares”.
Interest on DLA
Directors can choose to charge the company interest on the DLA balance owed to them. This interest is a tax deductible expense to the limited company and would then be taxed on the director personally as income. At
basic rate, the director can receive up to £1,000 of interest income overall tax free (£500 for higher rate taxpayers).
So, if you do trade as a company or are considering it, it is important to understand what monies you need out of the company for personal expenses and then take those monies in as tax efficient manner as possible.
Kathy Harris
September 2020
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