Tax Efficient Profit Extraction

By in ,

As a company owner you can choose how to extract the profits from your company, and by making the right choices you can minimise the tax and NI paid by you and the company.

The Taxman would like you to take all the profits in the form of a salary and possibly a bonus, as these carry the highest National Insurance charges and ensure the tax is deducted under PAYE before you get your hands on the net income. It is good practice to pay yourself at least a small salary that is covered by your personal allowance (£11,850 for 2018/19) as this makes the best use of your tax free allowances. However, the maximum salary you can take so that neither you nor the company pay NICs is £8,424 in 2018/19, as the threshold for NICs is lower than the tax free threshold. You will still receive NI contribution credits without actually paying NI.

Most company owners extract any further amount they need in the form of dividends. You can receive £2,000 of dividends tax free in 2018/19. Any dividends over £2,000 will be taxed at the following rates:

  • Dividends falling within the basic tax rate – 7.5% (£34,500)
  • Dividends falling with the higher tax rate – 32.5% (over £46,350 from April 2018)
  • Dividends falling with the additional rate of tax – 38.1% (income over £150,000 meaning restrictions on your personal allowance)

NI is not paid on dividends.

You can also charge a rent for assets you own which the company uses (although this could affect the availability of entrepreneurs’ relief on a sale of that asset). These assets could be real property (land) or intellectual property (e.g. patents). If you lend funds to the company it can pay you a commercial rate of interest on that loan. These profit extraction methods are free of NI charges.

We can discuss other methods of extracting profits, perhaps using your family members. Please contact us for specific advice in your own circumstances.