Tax efficient profit extraction

Are you paying more Tax and National Insurance than you should be? Could your take home cash be increased by considering alternative remuneration? Could you increase your total household income by utilising allowances?

As a director and shareholder there are a few ways to extract profit from your company efficiently and by utilising your allowances effectively.

Salary

Directors can generally be paid any level of salary, this is usually at a nominal amount to benefit from state pension credits but without National Insurance Contributions (‘NIC’) being payable.

The company will benefit from a Corporation Tax deduction for the cost of the Gross salary and any Employers NIC suffered.

Where family members work in the business, you could consider utilising their tax-free Personal Allowances by formally paying the individuals as employees of the company.

Benefits in Kind

The company could provide you with a taxable benefit, for example private medical or a company car. Company cars are dealt with under the Capital allowances regime in the company and the tax relief will differ dependant on the type of car.

Where benefits are provided the company must report these on a form P11D for each employee/director and submit a P11D(b) return. In addition, employer’s Class 1A NICs at 13.8% of the value of the benefit is payable by the company to the extent the value of the benefit is not made good by the employee. Instead of paying for the full cost of the Benefit, you are just paying the Tax.

The Company is entitled to Corporation Tax relief on the cost and NICs.

Pension contributions

Pension contributions can be made by an employer on behalf of an employee. Company pension contributions are not restricted to the net relevant earnings of the employee and the company will generally obtain a tax deduction for pension contributions when paid if the contributions are not excessive.

There is a tax-free Annual Allowance of pension contributions that can be made as well as a lifetime limit to consider. If the Allowances are exceeded this creates a personal tax charge.

Dividends

Shareholders can extract profits by way of dividends providing there are sufficient distributable reserves in the company. Dividends are subject to a lower rate of Income Tax (7.5%/32.5%/38.1%) than salary or self-employment income and do not currently attract NICs.

In addition to the Personal Allowance (£12,500 in 2019/20), individuals are currently entitled to the first £2,000 of dividend income tax-free. It may be worth considering utilising spouses £2,000 dividend allowance and making them a shareholder.

Dividends are paid from post-taxed profits and therefore no Corporation Tax relief is available on the distributions.

It is worth obtaining professional advice and considering your individual circumstances, as other sources of income play a part in utilising your allowances and tax rate bands.

Each year should be looked at in isolation and dividend/salary levels could decrease and increase each year.

The authors are Lauren Hanan, Tax Supervisor, and Sam Jones, Corporate Tax Senior Manager. If you would like to learn more please feel free to contact us here or call us on +44 (0)330 124 1399.

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