By Kathleen Duan (CA) Q-Business Advisory Limited
You may just set up a company and want to operate the business with your family members or friends and want to know how you should pay yourself for running the business, especially for the first couple of years when business income is uncertain.
Based on my years of experiences, I strongly suggest you DO NOT pay yourself via PAYE salary, especially in the first couple of years.
You may wonder how do I pay my living costs if I do not have any other sources of income while I am running my business?
Depending on the cashflow situation of your company, if cashflow allows, you can regularly take money out of your business bank account during the year and you do not need to pay tax on these cash drawings.
At year-end, your accountant will work out a “paper entry” to record an appropriate amount of shareholder salary before completing your financial statements. Your drawings during the year are totaled as a debt owed by you to the Company which is offsetting by the shareholder salary that you “haven’t been paid”. If your shareholder salary amount is more than the debt, the company will pay you the shortfall shareholder salary; however, if your debt is more than your shareholder salary, you need to pay interest to the company.
Instead of paying your personal tax monthly through PAYE, you as the shareholder of the company, paying your personal tax only at the end of the financial year. Deferring your personal tax this way assists with cash flow throughout the year, most desirable advantage is that you will not overpay yourself PAYE tax to IRD which is not refundable. This is particularly crucial for the first few years of business when the business profit is not certain until at end of year.
For an example, ABC Company is owned and run by Danial, Danial paid himself annual PAYE salary $50K, however, it turns out the Net profit of the company for 2013 is only $30K. If Daniel chose to pay himself via Shareholder Salary, the tax liability is only $4,270 at the end of the year; but he has paid IRD PAYE tax $8,020 during year, it is impossible for him to get the overpaid tax of $3,750 back from IRD!
How to get it right and avoid paying interest on overdrawn debt to the company, come and talk to us to find a comprehensive advice on how to structure your business tax that is best for your situation.
Disclaimer:
This article is of a general nature only. Please obtain specific advice on client situations as minor changes in facts may result in significantly difference outcomes. This article does not purport to cover all aspect of tax law relevant to the topics covered.
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