New Company x New Director
Tips and tricks for new directors
You've just started a new company but you're not sure what you're meant to do. We're here for you with this simple guide.
We'll answer the most common questions including:
How to withdraw money from your business
Determine your optimum salary and dividend structure
Most directors declare a small salary through payroll and withdraw the remainder of their funds as dividends.
While every director's situation is different, we usually recommend declaring income in this order:
| Priority | Withdrawal Type (2023/24) | Typical Tax Rate |
|---|---|---|
1 | Salary up to £9,100 per year or £758 per month | Tax-free for you and a tax-deductible expense for the business. |
2 | Dividends up to the £1,000 | Tax-free, but dividends can only be declared out of sufficient profits. Dividends are declared after you have paid corporation tax on profits. |
3 | Repay directors loans | Any money you've invested in the business can be taken out tax-free, but you should take advantage of your tax-free personal allowances first. |
4 | Salary up to £12,570 | Potentially tax-free if you have a small number of employees. |
5 | Dividends above this level | Most people will pay tax on dividends starting at 8.75%. You'll have to pay for the tax personally, so try to factor the tax into the dividend itself. |
6 | More dividends | It's a good idea to ask your accountant to calculate the optimal strategy for you if you're earning more than £50,000 per year. |
This usually holds true if the business is your only source of income. It's a bit more complicated if you have other earnings, or if you've just started the business and you have earnings from a previous employer in the current the tax year.
We calculate the optimum earnings structure for every client based on their individual circumstances.
How to withdraw dividends
People often create confusing and arbitrary guidelines around dividends so let's cut through the clutter.
Shareholders Not Directors
Dividends are paid to shareholders not directors. Most business owners are a shareholder and a director of their company.
Frequency
Dividends can be paid out as often as you like, whether that's annually, quarterly or monthly. You could theoretically pay them every day but the best approach is once a month, with occasional top-ups when you need more money.
Payments
Dividends are payments from a company to the shareholders. You don't need to do anything special when making the payment - a normal bank transfer will suffice.
Available Profits
Dividends can only be declared from profits.
If you know you have sufficient profits then feel free to withdraw dividends - it's your company at the end of the day. Just remember to keep money in the company for corporation tax.
Example: Your company makes pre-tax profit of £10,000, on which you estimate corporation tax of £2,000. Post tax profit of £8,000 is available as dividends.
The above example is highly simplified, and the actual calculation will need to factor in previous years profits less any dividends that have been declared in the past, amongst other things.
If your business is new and is not yet profitable, then much depends on whether you've lent money to the business to get started. Here are a couple of options:
You might declare a small salary. Any additional funds you withdraw from the business can be repaid from the money you lent the business to get started.
You might declaring a salary to cover everything you earn from your business if you've withdrawn all of your initial loan or never lent the company money in the first place.
Corporation Tax
Dividends are declared from profit after tax. Profitable companies should put aside 19-26% to cover corporation tax before paying dividends to shareholders.
Timing
Dividends can be withdrawn in your first year of trading before you've submitted accounts. If you know your company is profitable, then you can withdraw dividends, you don't have to wait until after your company year-end.
Documentation
You don't need to create any formal documentation or board resolutions before you withdraw money if you own your own small business. Practically speaking, we'll still need to draw up the documentation, but we can do that shortly after you have withdrawn the funds.
How to declare a small salary
Let's look at three potential salaries using thresholds from the 2023/34 tax year:
Small salary of £9,100 per year or £758 per month - completely free of tax and national insurance
Small salary of £12,570 per year £1,047.50 per month - no tax or employee national insurance, but creates a small employer national insurance liability
Large salary covering all of your takings - generally the least tax-efficient approach
To declare your chosen salary you'll need to:
Register with HMRC as an employer
Download or subscribe to payroll software
You'll need to remember to send monthly payroll Real Time Information (RTI) submissions to HMRC:
FPS - must be sent for each payroll, on or before the pay date
EPS - optional in any month, you'll send an EPS to claim the Employment Allowance if you're eligible or to claim other statutory repayments (such as Statutory Maternity Pay).
How to send these reports varies depending on the system you decide to use. Late FPS submissions will incur penalties starting from £100 per late return.
As your accountant - we'll handle all of this!
Contributing to your pension as a director
For someone that owns their own business - we usually suggest that the company makes 'employer contributions' into your pension scheme. It is often better than alternatives like extracting dividends and paying a personal contribution into a pension scheme. It is also superior to 'ordinary' auto enrolment, which is why we usually recommend that directors not take part in their employee auto enrolment pension scheme.
Furthermore, you can make near-unlimited employer contributions into your personal pension scheme, as long as they are reasonable for your position in the business. They count towards the annual allowance of £60,000 and most startup and small business owners will contribute less than this amount.
Employer contributions are tax deductible for the business too (ie they reduce corporation tax). You just need to make the actual payment before the end of your company's accounting period.
Employees do not need to be in the same workplace pension as directors - the only requirement is that you meet the statutory minimum for worker pensions. You can have any number of groups of workers with varying contribution methodologies.
Example: £10,000 per year is a perfectly legitimate employer contribution for most directors. Corporation tax will be reduced by £1,900 to £2,600 based on current rates.
Keeping money aside for taxes
Managing cashflow is one of the great challenges for small business owners. It's not unusual to be blindsided by an unexpected tax liability. On the flipside, most taxes are paid well after the period they relate to, so you'll often find yourself holding onto cash that you should put aside to pay HMRC.
Over time we've come up with a series of tips to help you keep the right amount of money aside, so let's walk though the three main business taxes and personal tax.
VAT
If you're VAT registered then you'll charge be charging VAT to your customers. Keep this portion of your sales receipts aside as you receive money from your customers.
This is easy to do if you only have a handful of fees each month. But if you have a lot of transactions - like a coffee shop - then we'd suggest finding the VAT report on your sales system and putting this money aside weekly.
You'll also pay VAT which you can claim back on your VAT return. You can either treat this money as a bonus cash payment each quarter, or you can adjust the percentage of sales receipts that you put aside based on previous tax returns.
PAYE and NI
Lots of new employers find this difficult. When we run payroll, we'll tell you how much to pay each member of staff and how much to pay HMRC. The amount of tax you pay will vary depending on each employee's circumstances.
You'll pay your employees on payday, and you'll pay HMRC the following month by the 22nd. Some small companies qualify for quarterly payments, but we still recommend paying HMRC monthly.
Example: You offer someone a gross salary of £2,000 per month. In ordinary circumstances, you'll pay about:
£1,700 to your employee (after tax)
£300 to HMRC for employee taxes
£200 to HMRC for employer taxes
So the overall cost to you is £2,000 plus £200 in employer taxes.
Corporation Tax
Corporation tax is charged at 19% on the first £50,000 of profits. It is paid nine months and one day after your company year-end.
Example: Your company year-end is 31st December and you made taxable profits of £20,000. You'll need to pay corporation tax of £3,800 by 1st November.
You should have a rough idea of your profits by asking us or by maintaining your own profit and loss reports. Keep one-fifth aside and you'll have enough to pay HMRC when the time comes.
You can also ask us to prepare your accounts as soon as possible after year-end. In the example above, if we were to prepare your accounts in January, then you'd have eight months to prepare for the tax liability.
We should highlight that accounting profit, taxable profit and cash profit are not the same thing. But for most businesses they are very similar. You may need to adjust the tax estimate slightly for your specific business.
Personal Income Tax
You'll pay personal income tax either through payroll or a self assessment tax return.
If you pay yourself only through payroll, then you'll pay all of your taxes through PAYE, and you won't need to keep anything aside.
If you also declare dividends, or have any other income, then you'll need to keep money aside to cover your personal tax liability.
There are countless variations, so we can't walk you through everything, but we'll highlight one area in particular. If you draw dividends from your company, then you'll pay tax your self assessment tax return. We've drawn up a personal withdrawals table above that will give you an idea of the amount of tax you'll pay.
UK and foreign bank accounts
You have lots of options, but here at Numble we use:
Starling Bank as our main bank account
American Express credit cards to collect reward points on business spending
Pleo for employee expenses
GoCardless to collect direct debits
I usually advise new business owners to set up a bank account with the challenger banks, like Starling, Tide or Revolut. Challenger bank apps tend to be faster and easier to use, while their bank feeds are faster and break less often.
If you have more than £50,000 in cash, then you should consider holding cash in multiple bank accounts to reduce your exposure to any individual bank.
For spending and receiving funds in other currencies, we always recommend Wise. It's not a bank account, so you should not keep large balances in a Wise account, but they offer healthy exchange rates and extremely fast currency conversions.
Keeping receipts
It's a legal requirement to keep evidence to support your business transactions. Storing invoices and receipts is a vital requirement for every business owner.
You can store invoices and receipts digitally - we use Dext but you can use Dropbox or Drive if you're looking for a free alternative. You do not need to keep hard copies if you have stored invoices safely online.
In practice, you'll lose some receipts. That's a perfectly normal occurrence. Just try to keep the vast majority of invoices and receipts and you'll do just fine.
However, it's really important that you make an effort to store VAT invoices if you want to claim this back from HMRC. HMRC often disallow claims if they investigate your VAT return and you don't have a valid VAT invoice or receipt.
Working from home expenses
Most of the time, if you do any work from home, then you can claim a flat rate working from home allowance. We'll capture these when we prepare your annual accounts. This is our recommended approach.
Alternatively, you might be able to claim specific costs based on rent (or mortgage interest) and other bills. This often yields a larger expense claim, but can be a little hard to prove. Let us know if you'd like to run this calculation.
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