Tax Efficient Method of Releasing Income from UK Limited Company

There have been recent changes to the UK regime and in particular a large number of limited company owners have been affected by the new dividend tax that was introduced by the UK Government on 6 April 2016. This new tax takes affect during the current tax year for the first time and will result in an increase in tax paid by the vast majority of limited company directors. Given these changes there are still low tax options for releasing income from a limited company and these will be explained further below. You shouldn’t be put off from operating a limited company structure as there are significant benefits associated with this company structure which go beyond the tax gains.

Let’s recap on some of the non-tax benefits of operating a limited company before we get into the details regarding the releasing of income. The single largest benefit of operating a limited company structure is the limited liability associated with the company. The company is recognised as a legal entity and it is the company only that is responsible for the payment of any bills or liabilities. This means that limited company directors and shareholders are not directly liable for any bills that cannot be paid by the company. This is a huge protection for anyone operating a limited company and can shield you from your home or other personal assets being at risk. A limited company structure also looks for more professional to prospective clients or customers and may help land future work or contracts. A limited company can pay dividends to its shareholders and these generally attract less tax than income via PAYE.

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I’ve started to comment on some of the income related benefits of operating a limited company so now I’ll explain the tax efficient method of extracting income I referred to within the opening paragraph. The straight forward strategy of paying a low salary and then dividends on top of this remains the most tax efficient method of releasing income from a limited company. Despite the changes to dividend tax and the removal of the dividend tax credit this income extraction strategy still results in the lowest tax take for limited company directors. My advice is for the limited company to pay you a salary of £670 a month and then for the company to issue you dividends over and above this salary value.

The amount of tax you pay when compared to previous tax years will increase but this increase is not excessive and you will still pay far less tax when compared to receiving a salary from permanent employment via the PAYE tax system. For a company director with income of £43,000 you are only likely to pay an additional £2,000 in tax which isn’t too bad. You would pay close to £11,000 in income tax and national insurance if you earned the same salary through PAYE.

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Muhammad Aamir is an avid learner and online marketing consulting. Including guest blogger, blog posts sailing and link building. Social Profiles: Twitter, Facebook, Google Plus Contact:

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