Running a business can offer you a lot of freedom and many business owners tell us they wouldn’t want to go back to paid employment or having a boss. Running the show, calling the shots, and of course paying yourself are some of the many reasons that more people are starting up their own business.
Of course, when you get involved in running a business you soon work out that the accounting side of things is a little more complicated than you thought! Paying tax isn’t quite as simple as when you had the standard PAYE system in your old job.
There are many situations that require you to pay tax and if you don’t get it right you can end up paying far too much.
We’re proud to say that we save our clients more on tax than they pay us in accountancy fees and one of the reasons for this is saving them from paying tax on profits… legitimately, obviously.
Getting money out of your business isn’t always as simple as it seems as you need to account for every penny that leaves, and you can’t just buy anything with your company pot.
Here are two ways to draw money from your business for personal use that could save you tax. Do ask us or your accountant before making any decisions.
Employing a spouse or partner
Working with your partner may or may not be something you’ve considered (or could cope with!) but there are some really good tax reasons to do so. When you’re looking to save tax or ‘take home’ more tax-free cash from your business, employing a spouse is a valid option for you. Although this isn’t entirely tax-free, there are some tax-saving benefits to doing it.
There are two very good reasons to employ your spouse or partner.
- It reduces your profits and thus reduces your corporation tax bill
Taking on another employee obviously reduces your profits, and this will reduce the amount of tax that you need to pay on those profits. By spending more on direct wages your company will limit their overall profits and this in turn reduces the amount you pay on tax. In this instance you’re also bringing in more money to your household which ticks two boxes as the company owner. Lower corporation tax, and more cash from the business direct to your household.
- More money out to your household in a tax-free manner
By employing a spouse, you’re adding some extra money into your household each month whilst also reducing the tax burden to the company over the year. Win, win. If you were to simply pay yourself more, then you’d pay more in tax. Paying the wage to someone else to do the job that would obviously mean the money not coming back to your household.
It’s worth noting that this is only an option when the spouse or partner has a low income (under £12,570) or has no income earning currently.
Add your partner as a shareholder in the business
Another way to take home more tax-free money than you already do also involves a spouse of partner. Instead of (or as well as) employing them, you could make your spouse or partner a shareholder in the business. Shareholders are obviously entitled to payouts from the company and don’t need to pay anything to become one.
You could make your spouse or partner a shareholder and then pay them dividends in the same way that you pay yourself. At the moment that would mean that you could give £1,000 in dividends tax-free.
A word of warning…
Obviously, you can’t just employ your spouse or partner and leave it at that. They have to work within your business, and you do need to be able to demonstrate that if you were ever asked by HMRC. In addition to this, adding someone as a shareholder can give rise to other tax charges, so please make sure you ask your accountant about this too.
This is simply a good option if they have the right skills to contribute to your business and you’d rather employ them over someone else. They would need to be good at their role, adding value to your company, by helping with bookkeeping or other admin, and help you and the business by doing a great job.
Saving tax is one thing, adding another burden is another.
If you need help to set this up or advice on other ways to legitimately save on tax, then please do contact us today.