Most business owners will be aware that if you have a limited company, it is seen legally as a separate entity. In other words, you can’t just withdraw money as if it were your personal bank account – that money belongs to the business.

There are two main methods to withdraw money correctly from your business:

  1. Salary
  2. Dividends

1- Salary

As an employee, a Director can opt to take a salary which will be subject to tax and National Insurance Contributions. Typically a director would pay themselves a small salary; for example up to the personal tax free allowance.

The good news is that since the Chancellor’s recent Emergency budget last week, the tax-free Personal Allowance will be increased from £10,600 in 2015-16 to £11,000 in April 2016-17.

2- Dividends

After taking a salary from your company, you can leave any remaining income for further investment or to support your business. You can also take money in the form of a dividend. A dividend is a payment your company can make to shareholders (that’s you the director and anyone else you have nominated) from the shareholder funds of the business. Any dividend drawn is subject to tax.

Since the Emergency budget, the dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Tax rates on dividend income will be increased.

The chancellor tells us this is a simpler system that means only those with significant dividend income will pay more tax. Investors with modest income from shares will see either a tax cut or no change in the amount of tax they owe. It’s a balancing act and whether it benefits you and your business will depend on many factors.

Salary or dividends?

Many business owners may ask ‘How do I get the best balance of drawing a salary and paying myself a dividend?’ As a general rule – as a basic rate tax payer – a Director of a business should look to pay themselves a small salary with the remainder of their income via dividends.

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