Managing Directors’ Personal Tax When Drawing Income from a Limited Company
Navigating personal and business finances can be a bit of a balancing act, especially if you’re wearing multiple hats as both a company director and a full-time employee. If you find yourself in the higher tax bracket, you might be wondering how best to handle your income from your limited company. Let’s explore some strategies to manage this efficiently.
Drawing Income the Right Way
As a director of a limited company who also has a well-paying full-time job that puts you in the 40% tax bracket, it’s understandable that you might choose not to pay yourself a regular salary from the company. Instead, you may prefer to take occasional lump sums as needed and then leave it to your accountant to sort out the details. However, this approach can sometimes feel rather basic and might lead to financial stress when your tax obligations come due.
So, how do fellow company directors manage this situation?
Setting Aside Money for Taxes
A common approach is to set aside a certain percentage of any income withdrawn from the company in anticipation of future tax liabilities. For instance, if you decide to take out £1,000, you might consider setting aside an extra £250 (or 20% as an arbitrary figure) in a separate account, creating a buffer for when the tax bill arrives. This method can help mitigate the shock of a hefty tax payment, though it might feel a bit rudimentary.
Planning and Consultation
Of course, it’s crucial to consult with your accountant for personalized advice tailored to your specific circumstances. Your financial professional can provide insight into the best practices for tax planning, ensuring you meet your obligations without unwelcome surprises.
Learning by Asking
While you’re new to managing personal tax in relation to company income, it’s beneficial to ask for advice and learn about others’ experiences. Engaging with a community of like-minded individuals can provide inspiration and practical tips. Even if you’ve yet to receive a personal income tax bill, being proactive is always a smart move.
Remember, you’re not alone in this journey. Seeking guidance and continuously learning will help you manage your finances more effectively.
Thank you for coming along on this exploratory journey into personal tax management. Your curiosity and the willingness to ask questions is a great asset as you navigate the world of business finance!
1 Comment
bdadmin
Hello,
Navigating the financial responsibilities of owning a limited company while managing a full-time job can indeed be perplexing, especially when it comes to optimizing your personal and corporate finances. The approach you’re contemplating—setting aside a portion of the withdrawal for tax purposes—is generally a prudent strategy, though there are some considerations and best practices that might enhance your current method.
Understanding the Tax Implications
First, it’s crucial to understand the nature of the transactions you are referencing as “squirts.” Typically, directors might take money from their company in the form of salaries, dividends, or director’s loans, each of which has different tax implications.
Dividends: If you are withdrawing funds as dividends, it’s wise to be aware that dividends are not subject to National Insurance Contributions (NICs), but they are subject to dividend tax. Given your existing income places you in the higher tax bracket, any dividends you withdraw would likely fall into the 32.5% or 38.1% tax band, as indicated by UK tax brackets. Thus, setting aside an appropriate percentage based on your total expected tax liabilities is intelligent.
Salary: If you do decide to take a salary in the future, it’s beneficial up to the personal allowance and the NIC threshold. Beyond that, it usually incurs higher tax rates which might not be optimal.
Director’s Loan: Taking a director’s loan can be effective for short-term liquidity but has its complexities if not managed well by the financial year-end.
Practical Steps Moving Forward
Consult with an Accountant: While it’s essential to explore strategies others are using, an in-depth conversation with your accountant tailored to your specific situation can provide clarity and ensure compliance with tax laws. They can help you project your tax liability based on your withdrawals, ensuring you are neither over nor under-saving.
Create a Tax Pot: A separate savings account dedicated to tax reserves can be beneficial. If you anticipate taking £1,000 for personal use, consider the gross amount including the anticipated tax liability you may eventually owe. For example, if withdrawing as dividends, setting aside around 32.5% to 38.1% (based on exceeding the dividend allowance) is advisable for tax purposes. Adjust these figures according to your accountant’s guidance and latest tax rules.
Strategize Withdrawals: Plan your withdrawals based on cash flow forecasts. By anticipating your cash flow needs, you can manage tax efficiencies better