Directors Drawings

What can you take as “drawings” from your company and avoid or minimise higher rate tax?

Given the range of matters discussed at our first meeting, it will be fully understandable if you didn’t quite grasp the concept of “taking drawings” from your company and forgetting all about salaries, dividends, reimbursement of mileage and other expenses. What we do is simplify matters in a way that ensures that, if you want to avoid higher rate tax in the year if possible, we will do all we can to keep you advised on this as the personal tax year progresses, especially if we think you may need to rein in on your “drawings” before the end of the year.

“Drawings” are the amounts you extract from the company for yourself. You take these, preferably in round sum amounts, maybe weekly or monthly. At the end of each trading quarter, we compare your “drawings” with the salary processed for that period and the expenses you paid for out of your pocket, and then we declare a dividend to match the one with the other. We match one with the other because you must never be in debt to your company. That in broad terms is all that there is to “drawings”.  

So, if you want to avoid higher rate tax, what drawings can you personally take in the year to 5 April 2018?

The answer is about £43000 for you as director, together with the expenses such as mileage and any other ‘out of pocket’ expenses recorded on your expenditure record in its right hand column. If these expenses total (say) £6000 for the year (and we can only know this more precisely as the year goes along), then “drawings” can be £49000 in the year, or £4000 per month without higher rate tax, just tax at 7½% on dividends.

Are there items that may result in this “drawings” figure being adjusted upwards?

Yes, and these depend on your personal circumstances.  Examples would be:

• If your wife or partner is employed in the company, we will have discussed what she can earn – say £7800 per personal tax year. Depending on whether she is elsewhere employed as well, her salary net of tax could be anything from about £6500 (if she is) to the full £7800 (if she is not). This amount would add to the scope for “drawings” to both of you in the year, but remember that the salary begins from when the company started, so it may be a pro-rata figure, for example, if the company begins in November, the salary will be 5/12 x £7800.
• If your wife or partner is a shareholder and is not paying higher rate tax, then she could receive a dividend of up to £10000 in the year (or one third of what you receive, whichever is lower) and this too would add to the amount of your “drawings”. You need to establish what her ballpark salary (from all sources) is likely to be in the personal tax year to see what is possible without higher rate tax.
• If you make personal pension contributions personally (in other words the company does not make its own contributions to your pension), these will increase how much you earn before higher rate tax applies.

Final points

• Regardless of what “drawings” you can take, you MUST NOT draw more than ⅔ of what has been banked in the year, to allow for tax and vat etc that the company has to pay and a small reserve being built up “for a rainy day”.
• Your “drawings”, if they are both to you and your wife/partner must be put into a joint bank account to avoid possible scrutiny of drawings by HMRC. Once in a joint account, where the drawings go is of no concern to HMRC or to us.
• If your “drawings” take you into higher rate tax because you don’t think that you can avoid it, the above comments still apply. Even if higher rate tax is inevitable, you would still rather pay say only £2500 instead of £4000 if you can find legitimate ways of postponing drawings until next tax year e.g. by use of credit cards.