When running a limited company, it’s easy to get so caught up in how you’re going to make a profit that you don’t properly consider what to do with it afterwards.
As a business owner, you have several options for your funds to benefit both yourself and your company. In this blog post, we explore some of those options.
As a director and shareholder of a limited company, you have a great way to pay yourself compared to some other business owners, like sole traders.
This is because you can pay yourself mostly with dividends, which are taxed lower than regular income, specifically:
|Tax type||Basic rate||Additional rate||Higher rate|
|Dividend tax rate||8.75%||33.75%||39.35%|
|Income tax rate||20%||40%||45%|
Remember, though, that everyone has a personal allowance for income tax of £12,570, which you should use to maximise your tax savings.
However, employee National Insurance contributions become payable when your salary reaches £11,908 (at 13.25%). Furthermore, employer National Insurance contributions kick in at £9,100 (at 15.05%).
Therefore, some company directors keep their salary above £6,396 (so they are entitled to the state pension) but below £9,100 — and top it up with dividends.
Setting aside some of your company profits is about more than just your paycheck — you should always contribute to your personal pension to safeguard your future, too.
Unlike personal contributions, there’s no limit on what your company is allowed to pay into your pension and obtain tax relief — as long as HMRC agrees that it is an allowable expense. If it does, you can subtract your contributions from your pre-tax profit.
Just be aware that employer contributions count towards your annual allowance for pension tax relief, which is currently £60,000.
Stocks and shares
Investing in stocks and shares is an alternative option for long term saving (many people do it in addition to pension contributions).
When it comes to investment portfolios, you should always discuss your plans with a financial adviser. Generally speaking, though, it’s a good idea to diversify your portfolio. That way, if one asset performs poorly, it should be covered by another.
Be aware, too, that tax might be due on returns you see from your investments. The rules around this can be complex and will vary depending on factors like the size of your company and the type of investment you make.
Again, make sure to speak to an adviser. They’ll be able to ensure you make informed investment decisions that align with your risk tolerance, ethics and long-term financial goals.
Are you struggling, like so many other UK businesses, to retain and recruit staff? Setting aside some profit for employee benefits could be a smart move.
Popular benefits in the UK include:
- pension schemes
- private healthcare
- life insurance
- childcare vouchers
- cycle-to-work schemes.
By using a portion of your profits to provide these benefits, you not only enhance employee satisfaction and loyalty, but potentially also enjoy tax advantages, such as National Insurance savings.
Reinvest in the business
Reinvesting a portion of your limited company profits back into the business is a strategic, sure-fire way to fuel growth and drive success. That could mean upgrading equipment, expanding your product line, investing in marketing and advertising, or improving operational efficiency.
If you’re not sure you can afford investments, remember that the UK Government offers tax incentives for certain investments, such as the annual investment allowance, which allows businesses to claim tax relief on qualifying capital expenditures.
Unsure on how to split your company profits to maximise your business’s potential while rewarding yourself for your hard work? Talk to us — we’d be happy to help.