Family Business? Taking Money Out: A Simplified Guide

Running a family business is a team effort, you're the heart and soul of the operation. But when it comes to paying yourself, things can get confusing faster than a toddler with a box of crayons.

Just taking cash out here and there might seem easy, but it can actually hurt your business in the long run. Imagine your business is a family piggy bank. You want to take out some money for yourself (because you deserve it!), but you also need to make sure there's enough left over for bills and to keep the business growing.

There are two main ways to take money out that are legal and easy to understand: Salary and Dividends. Here's a breakdown of each:

Salary Power!

• Just like a regular employee, you can pay yourself a regular salary. This keeps things consistent and helps you budget wisely.

• Benefits:

  • Your company can deduct the salary you pay yourself, plus employer National Insurance contributions, which reduces your taxable profits (meaning you pay less tax!).

  • You can pay yourself a salary to qualify for state pension and other benefits (like maternity leave) if you don't already meet the requirements.

• Things to Consider:

  • There's a sweet spot for salary amounts. For 2024/25, the ideal salary to avoid tax and National Insurance for you (the employee) is £12,570.

  • However, your company will still owe some employer National Insurance on this salary (around £478 for 2024/25) unless you qualify for the Employment Allowance (which helps small businesses reduce National Insurance costs).

Profit Party! (Dividends)

• Once your business makes money, you can take a share of the profits as a "dividend." Think of it as a bonus for all your hard work! Dividends are paid out of your company's profits after taxes have already been paid.

• Benefits:

  • Dividends are taxed at a lower rate than salary, with a portion even being tax-free (up to £500 for 2024/25).

  • More flexibility – you can adjust dividends based on your business's profits and your personal needs.

• Things to Consider:

  • Dividends must come from your company's retained profits (money left over after expenses and taxes).

  • If you have multiple shareholders, dividends must be split fairly based on shareholdings.

Pension Power

• While not directly taking money out, contributing to a pension is a great way to save for your future. Your company can contribute to your pension plan, which reduces your company's taxable profits.

• This is a good option for long-term planning and reduces your future tax burden.

Remember:

• Keep good records of your finances.

• Talk to your accountant! They can help you choose the most tax-efficient way to take money out based on your specific circumstances.

By planning how you take money out, you're making sure your family business thrives and you get to enjoy the rewards of your hard work. Now that's something the whole family can celebrate!