For income earned from contracts which are likely to be caught by the rules, the choices available to extract funds for living expenses include:
- paying a salary
- borrowing from the company and repaying the loan out of salary as 5 April approaches
- paying interim dividends.
The advantage of paying a salary is that the tax payments are spread throughout the year and not left as a large lump sum to pay on 19 April. The disadvantage is fairly obvious!
Borrowing from the company on a temporary basis may mean that no tax is paid when the loan is taken out, but it will result in tax and NICs on the notional interest on the loan. There may also be a need to make a payment to HMRC equal to 25% of the loan under the ‘loans to participators’ rules.
The payment of dividends may be the most attractive route. If a deemed payment is treated as made in a tax year, but the company has already paid the same amount to you or another shareholder during the year as a dividend, you will be allowed to make a claim for the tax on the dividend to be relieved to avoid double taxation.
The company must submit a claim identifying the dividends which are to be relieved.