A guide for medical professionals.

So, you have incorporated and are now running your business as a limited company, your next question would naturally be how do I efficiently take money out of the company or structure a remuneration package?

In this article we will consider three methods to structure remuneration and the tax advantages of each.

Salary and dividends

The first and most common method of taking money out of your company is through a combination of salary and dividends.

The tax-free dividend allowance is £1,000 in the tax year 2023/24 and each shareholder can make use of this every year. However, it needs to be considered whether this additional income would push your income over £100,000 (reducing your personal allowance) or have an effect on your pension annual allowance.

Additionally, dividend payments have a lower rate of income tax than salary payments. However, it worth noting that unlike salaries, dividends are not classed as a business expense for corporation tax deduction.

As mentioned, any salary paid is a business expense however as a medical professional you are likely to already have salary income so it is unlikely that the company paying you a salary will be tax efficient although there are tax benefits in some instances.

Promoting family involvement

Something else to consider is paying salaries to your spouse or children if they are actively involved in the business. This approach can have significant tax advantages. Family members can receive salaries which will reduce taxable profits and if their total income remains within the personal allowance threshold without incurring income tax.

As discussed, salaries do result in a higher rate of personal tax than dividends so if you wish to pay your family over their personal allowance threshold then a more tax efficient way of doing this would be through dividend payments. These do not require an active involvement in the business however they would need to have shares in the business.

Finally, if a family member is actively involved in the company then the company can make tax-free pension contributions which additionally qualify as a deductible business expense.

Tax efficient expenses

Owner-directors of limited companies can benefit from using the company to pay for tax deductible expenses and reimbursing themselves for expenses paid personally such as:

Electric company car: While all company cars are subject to benefit-in-kind (BIK) tax, electric vehicles are subject to only 2% BIK tax (rising up to 5% in 2027/28) making them an extremely tax efficient way to remunerate yourself. The company also receives tax relief on the car costs.

Business use of home as office: If you use your home as an office then you can claim a proportion of your home expenses as a business cost, the company will in effect be paying you personally rent for using your home as business premises and can claim the cost as a tax deductible expense. Please note the home costs must be relevant and the proportion claimed should be reasonable.

Relevant life insurance policy premiums: These can be paid by a company for its employees, including directors, the cost is tax deductible and does not incur BIK tax. The biggest tax benefit is that the pay-out to the family is tax-free should a claim be made.

Staff entertainment and trivial benefits: The company can pay for annual staff functions as an expense which is tax deductible and does not incur BIK tax if the total cost over a tax year does not exceed £150 per employee. Additionally, the company can pay for trivial benefits for directors such as gift cards worth up to £300 in a tax year, this cost is tax deductible and does not incur BIK if it costs less than £50 to provide each time.

Efficiently structuring remuneration in your limited company is essential for maximizing the financial benefits of incorporating. By applying the above methods, you can optimize how you take money out of the company so that you are doing so in the most tax efficient way.