For the majority of people just starting out on their Amazon selling journey, it makes sense to register as a Sole Trader rather than a Ltd Company.
Of course, this won’t always be the case and there are a number of different factors to consider, which we covered in detail in a recent blog post: Sole Trader vs Limited Company for New Amazon Sellers in 2021.
But generally speaking, if you’re new to business then operating as a sole trader is an easier and more tax-efficient option. And really that’s the most important consideration by far – we all want to take home as much of our business’ profits as possible, not lose it all to taxes and the government!
When you’re a sole trader there’s not a lot you can really do about this – you have your personal allowance of tax-free income every year and then after that you pay income tax and national insurance on any further profit, exactly the same as if you’d earnt it as a wage.
It’s all very straightforward.
With a limited company however things start to get a bit more complicated, but that’s not necessarily a bad thing! It means if we do things properly and in a smart way we can reduce the amount we pay in taxes. Legally of course!
And that’s exactly what we’re going to go over in today’s post – the best ways to pay yourself as a Ltd Company to save tax.
But before we get started let me point out that I always recommend using an accountant for your business, especially if you’re at the level of profit where you’re registering a limited company. It really is a no-brainer – pay someone who’s an expert at what they do and not only will they save you time, which you can use to focus on the important, high-value parts of your business, they can even save you money.
Please don’t be penny smart, pound foolish when it comes to hiring an accountant. And I’ve actually arranged a special offer for my blog readers as I know a lot of people struggle finding a good, reasonably priced accountant. Read on until the end of the post to find out more!
Alright, so without further ado let’s get to it!
How Will You Define Your Role Within the Company When Deciding the Best Way to Pay Yourself?
This can really be split into 3 main roles:
- Employee – someone completing work for the company who expects to be paid for that work.
- Director – you must appoint a director when you form your company and by law, all UK limited companies must always have at least one director appointed at all times, whose job is to run the company, acting on behalf and in the best interest of the shareholders.
As a director, you’re legally responsible for your company’s records, accounts, and performance.
- Shareholder – a business owner, expecting to be paid out a percentage of the business’ profits.
For the vast majority of Amazon FBA businesses, you’ll be acting as the director and won’t have any additional employees.
What are the Most Tax-efficient Ways to Pay Yourself?
Director’s / Employee’s Expenses
As an employee of the company, you can expect to be reimbursed for all reasonable expenses paid personally on behalf of the business. This reduces your taxable profit and is therefore a very efficient way to get money out of the business.
As an employee of the company, you can expect to be reimbursed for all reasonable expenses paid personally on behalf of the business. This reduces your taxable profit and is therefore a very efficient way to get money out of the business. These include:
- Mileage for business purposes
Rather than buying a car or a van as a business expense, and then calculating the costs of the purchase and running of the vehicle (insurance, servicing, petrol, etc) while also having to take into account any personal benefit, it’s often more efficient to simply use the flat rate costs for business mileage at 45p per mile up to 10,000 miles per year and 25p per mile after 10,000 miles.
- Food costs
Now before you try and put your whole shopping bill down as an expense, this can only be used for food bought while completing work for the business. A company spending large amounts of their profit on food isn’t going to look right to HMRC so use common sense and be reasonable here!
You are also entitled to £150 a year for a staff party so take advantage of that as well.
- Home office expenses
How far you push this really depends on you personally but there are many costs to working from home that you could reasonably charge your business. For example your phone bill, part of your electricity and gas bills, any equipment such as computers, printers etc. My home office has a nice big TV in it for example – strictly for business purposes of course.
But you can’t just randomly allocate amounts here, it has to be calculated as a proportion of the total costs based on the amount of rooms and overall time spent for business use. In order to properly claim these costs you should also create a rental agreement between you and the business. This is definitely an area where I would advise getting an accountant to help you as you don’t want to make any mistakes.
Overall you should try to maximize your expenses as much as possible, as they reduce your company’s profits and therefore tax liabilities, so they’re a very tax-efficient way of extracting money from your business.
What other payment options are there to consider?
The most tax-efficient salary to take as a director is £8,840 (the secondary threshold for 2021/2022) as you’ll personally pay no income tax or national insurance contributions on that income, and your company also doesn’t have to make any employer’s national insurance contributions either.
Now some people may not be completely comfortable using this ‘ideal’ salary as if HMRC ever looked at it they could reasonably ask if this salary is in line with the job the director is doing? Another way of looking at it is to ask if you would reasonably hire someone at this salary? The answer would most likely be no to that question.
However it is the most tax efficient income, which is what this post is all about! If you have any doubts or worries then of course discuss it further with your own accountant who’ll be able to advise based on your individual circumstances.
Alright so once you’ve claimed all reasonable expenses and paid yourself a salary, the last remaining method for extracting profits as efficiently as possible is:
Dividends are payments made to company shareholders, taken from the company’s profits AFTER corporation tax has been accounted for.
The company itself doesn’t pay any additional tax on dividends but it’s considered income for you and has to be included within your annual self assessment.
Each year you get a tax free dividend allowance, which for 2021/2022 is £2,000. You won’t pay any income tax at all up to this amount, and this is completely separate from your yearly personal tax free allowance, which is £12,570 for 2021/2022.
So that basically means you get £14,570 of tax free income each year if you properly utilise your director’s salary and then dividend payments.
Any dividends you receive above that amount will be taxed as income, with the amount depending on your personal tax band.
For the tax year 2021/2022 there are 3 income bands as follows:
|Tax Band||Taxable Income||Income Tax Rate||Dividend Tax Rate|
|Basic Rate||£1 to £37,700||20%||7.5%|
|Higher Rate||£37,701 to £150,000||40%||32.5%|
|Additional Rate||Over £150,000||45%||38.1%|
As you can see the dividend tax rate is always less than the income tax rate.
But you have to remember that dividends are paid after corporation tax. That’s something that so many online articles and examples on this topic ignore when comparing income tax vs dividend tax as with dividends you’re effectively being taxed twice on your business’ profits!
Let’s go through an example so you can see how it all works together, using an Ltd company that made £65,000 in profit last year.
|Income||Income Type||Tax Rate||Tax to Pay|
|First £8,840||Director’s Salary||Tax Free Personal Allowance – 0%||£0|
|Next £2,000||Dividend||Tax Free Dividend Allowance – 0%||£0|
|Next £3,730||Dividend||Tax Free Personal Allowance – 0%||£0|
|Next £35,700||Dividend||Basic Rate Dividend Tax – 7.5%||£2,677.50|
|Final £14,730||Dividend||Higher Rate Dividend Tax – 32.5%||£4,787.25|
So in total as the director you’ll pay £7,464.75 in income tax.
But like I said, we need to include all the corporation tax paid as well to get a true figure.
From the initial £65,000 profit, you don’t pay corporation tax on the £8,840 taken as the director’s salary, which means 19% is paid on £56,160 which equals £10,670.40 in corporation tax.
And this gives a total tax paid of £7,464.75 + £10,670.40 = £18,135.15
This is a much more realistic cost of extracting £65,000 in profit from your business to you and gives you an effective tax rate of 27.9%
Let’s quickly see how this compares to a sole trader who makes the same £65,000 in profit. For them the tax would work out like this:
|Income||Income Type||Tax Rate||Tax to Pay|
|First £12,570||Profit/Salary||Tax Free Personal Allowance – 0%||£0|
|Next £37,700||Profit/Salary||Basic Rate Income Tax – 20%||£7,540|
|Last £14,730||Profit/Salary||Higher Rate Income Tax – 40%||£5,892|
That gives a total tax paid of £7,540 + £5,892 = £13,432 and an effective tax rate of 20.7%
So you’d actually save just under £5,000 in income tax, which shows how the lower dividend tax rate can actually be misleading. But unfortunately, it doesn’t stop there as we haven’t included national insurance!
Does an Amazon Seller Need to Hire an Accountant?
I hope you’re starting to understand why I always say hire a good accountant and let them take care of all of this for you! There’s just too much to consider and it’s not worth my time to have to worry about all of this.
On top of the income tax, you’ll also have to pay £4,116.38 in national insurance if you’re a sole trader, unlike with dividends which attract no national insurance payments at all.
That means that at £65,000 profit you’re paying roughly the same amount in tax as a sole trader vs as a limited company.
My recommendation has always been to start thinking about incorporating a limited company once you hit £60,000 in income (profit from your business + any salary you have if you also have a job) as the pros start to outweigh any negatives at that point. And this example shows that as it’s roughly the tipping point between taking home more profit as a limited company vs a sole trader.
Is it Really Beneficial to Consider an Ltd Company?
Before we end today’s post I have one last tip for you, and this is a big one!
I know I’ve mentioned this a few times now, but with good reason, as one of the big benefits of having a limited company is the flexibility in how you structure your business and pay yourself.
A perfect example of this is taking advantage of your family and spouse’s dividend allowance.
Going back to our earlier example of a company making £65,000 – say it’s a family-owned business with a wife and 3 children also being shareholders – then they can each be paid £2,000 in dividends (£8,000 in total) without paying any tax.
Previously this £8,000 was taxed at 32.5%, so this immediately saves you £2,600!
And this can be taken even further if you utilise your partner’s / family’s personal allowances and structure your shareholdings and salaries so that you stay at the lower tax bands where possible.
Exactly how far you can utilise this will depend on your business, how involved everyone is and their own personal incomes, but I hope you see the possibilities here!
Once again, I suggest speaking to an accountant who can look into your personal situation and give you tailored advice.
Free Accounting Consultation for Blog Readers
Which brings me to the final point of today’s post and the special offer which I mentioned earlier.
It’s my pleasure to say that I’ve spoken to a UK based accountant, Robin Thatcher, the owner of By The Book Accountancy, who will be offering free consultations to blog readers and Amazon Sharks members.
I actually first came across Robin through a recommendation from an Amazon Sharks member and he offers a wealth of ecommerce knowledge. He gave a lot of useful info to help put this guide together and this is the main reason why I’m happy to recommend him as ecommerce and Amazon sellers make up a large part of his client base, which is incredibly useful compared to some of the more traditional accountants who don’t understand the ins and outs of running an Amazon FBA business.
Robin deals with both sole traders and limited companies and can help you at any stage of your business, so if you’d like to take advantage of the free consultation then contact him at firstname.lastname@example.org and mention Andrew Minalto.
I don’t receive any financial incentive at all for making this recommendation, it’s purely to help my blog readers
That’s all from me for now. I hope you’ve found this guide useful and most importantly that it saves you some money!
Until next time!
All the best,
Disclaimer – all information given in this article is strictly my own opinion and doesn’t constitute legal advice. Please always consult a professional if needed.
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Interesting read as always.
One thing I’m interested in, is the process of changing from Sole Trader to Limited on Seller Central. I know they’ve taken steps to make it easier but still hear frequent stories of money going on hold and account being suspended for long periods of time, whilst the change of drags out.
Do you have any thoughts or reassuring insights on changing over?
This is one of those things that always sounds like a horror story online but in actual fact most of the time it goes completely smoothly! I’ve personally helped a few Amazon Sharks members through this change recently and it was all taken care of within a few days without any problems.