Your company pays corporation tax on its profits, but you are only taxed personally on what you draw out of the company as a salary, bonus, or by other means.
The dividends you receive from your company are effectively tax-free, if your total income for the tax year is less than about £37,000. Once you reach that limit you may want to think about extracting profits in different, more tax-efficient ways. Here are some alternative approaches:
Make sure you are using any tax-free allowances available such as mileage paid for the business journeys you drive.
This mileage rate varies according to the number of miles driven in the tax year, and whether you drive your own car or a company car. A low emissions company car can still be a tax-efficient way of providing a smaller car for you or another member of your family.
Keep it in the family
If you have young children, your company can provide you with £2,600 of tax-free childcare vouchers per year. This is doubled if your spouse or partner also works for your company.
When you pay your spouse between £84 and £97 per week (2007/08 rates), they may pay no national insurance or tax on that income (depending on their circumstances).
However, a wage at this level will count toward their entitlement to a state retirement pension. The company should pay at least the minimum wage of £5.05 per hour, and keep a record of the work done to justify the cost on business grounds.
Pay attention to pensions
The company can pay very tax-efficient pension contributions into your own (or any employee's) personal pension scheme, or into a self-administered pension scheme. The new pension rules from 6 April 2006 increase the limit of the pension contributions you and your company can make. Care should be taken to ensure that the individual's total remuneration package, including the pension, is justifiable for the work performed.
If you own a property that the company uses for its business, perhaps land used as a car park, a lock-up garage, or even an office building, the company can pay you a market rent.
This rent should be declared on your personal tax return and you will pay income tax under self-assessment. You can offset a range of costs connected with the property and there is no NI payable on rental income.
When you come to sell that property it will qualify for a higher level of taper relief to reduce the capital gains tax due.