Most small business owners know that the only three legitimate ways of extracting money from a company are:
However, the above three ways are not exactly tax-free!
If your salary exceeds your personal tax-free allowance (currently set at £12,500), then you will have to pay Income Tax and National Insurance.
If you pay yourself more than 2K of dividends per year, you will be paying tax on any additional amounts paid out to you.
A loan that you can take from your company can be an attractive alternative to other ways of borrowing as it is interest-free. However, the downside isthat such a loan can only be paid from the business to you after corporation tax has been paid and has to be repaid to the company within a limited period of time.
The good news is that salary, dividends and loans are not the only tax efficient ways you can take money out of your business.
Check out a list below for some of the most popular ways of extracting cash from a limited company, while reducing your corporation tax and not increasing your personal tax bill either!
- Pay into your private pension fund
- Pay into your ‘relevant’ life insurance
- Pay for a training to upgrade your skills
- Pay yourself £300 per year for personal (not business-related) purchases
- Pay for an overseas medical treatment
- Pay for an annual medical check up
- Pay for a Christmas family party or a meal
- Pay yourself an allowance for use of your home as an office
- Pay a salary to your partner or a close family member
- Get paid for renting or selling your personal asset to the business
- Pay for car parking
- Pay for your mobile phone handset, internet and call charges
- Pay for an occasional late hour taxi home
- Pay for your stationary and other home office costs
- Pay for occasional sit downs for a lunch or coffee that we all miss so much now!…
This list is not exhaustive but just good enough to make a point.
The reason why I love sharing these tips with people who are considering starting a ‘side hustle’ business is because many of us choose to pay for this kind of expenditure irrespectively of whether they have a business or not. But, if you have to pay for all these items from your employment income, you are in effect reducing money available for your livelihood and enjoyment of life, whereas if you manage to figure out your ‘gig’ to generate additional income for yourself, or even replace your salary completely, then your enjoyment of life can go further and also be tax free!
If you are at the point in your life when you are ready to use your innate creativity and self-authority more fully, book a free (no strings attached) chat and ask all the questions you might have about setting up your business. I love having this kind of conversations!