It's normal for contractors to take a salary to the extent of the taxable personal allowance, currently £11,500. Above that, you can take money in dividends to the extent of £33,500.
This total income of £45,000 will be in the basic rate tax band of 20%. Any more drawings above this level will result in higher rates of tax to pay. If you have other income, such as rental income from buy-to-let properties, the salary and dividends should be adjusted accordingly.
Am I allowed to pay my spouse and children a salary from the business?
Yes, you can pay a salary to family members if the salary is sensible and reflects the work undertaken by them in the business. However, the salary must be paid, and you will need to submit details to HMRC – especially if a state pension record is required.
If your family member’s earnings exceed £113 a week, then their earnings will qualify them for both state pension and additional state pension. If the earnings are below £157, you won’t be liable for National Insurance contributions.
I am a sole trader and my annual tax bill is very high. What can I do to reduce my tax?
If your spouse is also a pharmacist, you can form a general partnership with him or her. Another option is to incorporate the business into a limited liability company. Whereas you as an individual will pay tax at rates varying from 20% to 45%, a company pays a lower tax rate. Currently the rate is 19%, but this will go down to 17% by 2020-21, irrespective of how much profit it makes.
Your own personal drawings from the company can be structured as outlined in question one above. The overall tax saving could be substantial. The other alternative is to contribute money into a pension fund.
I have large amount of cash at bank in my company. If I want to sell my business, will this be a problem?
In our experience, having a large amount of cash in the bank should not in itself cause a problem when you dispose of the company, as long as you have the right firm of accountants and lawyers representing you to extract the cash in a tax-efficient way.
HMRC does look at this area very carefully. A large amount of cash in the company is considered as effectively undrawn dividends, and therefore the shareholders of the company should not be allowed entrepreneurs' relief. In this situation, extreme care is required.
Should I make a will?
There are many compelling reasons for drawing up a will. Without one, it could be up to the courts to decide where your money goes and who will be the guardians of your children. Your estate could incur thousands of pounds of unnecessary tax and legal costs.
If you are having a lawyer draw up a will, it may be cost effective to have a lasting power of attorney drafted at the same time. This enables you to nominate a trusted individual to deal with your affairs in the unfortunate event that you cannot deal with them yourself.
This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Umesh Modi BA ACA, is a chartered accountant and tax advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or [email protected]
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