How to efficiently extract profits from your company (profit extraction)
Are you concerned about extracting money from your company in the most tax efficient way? The best planning considers you and your company at the same time, and can give rise to a considerable tax saving.
It is increasingly common, particularly in owner managed companies, for the director/shareholders to maximise remuneration by way of non contentious tax planning methods; through understanding our clients and their businesses we have carried out planning and helped to prepare various strategies, saving tax and maximising returns. Here are just four of the ways you can also achieve this:
Saving for your retirement could deliver you a benefit now and is the most tax efficient method of extracting profit from your business. If you make the contribution yourself, you will get income tax relief at your highest rate of tax and if your company pays in, the company will get tax relief on the contribution.
Personal pension contributions are capped at £40,000 a year - less for those earning over £150,000 so the limits need to be carefully reviewed when you are already making monthly contributions.
To maximise tax efficiency it’s often the case that directors take a minimal salary and top up their income with dividends. By keeping a director’s salary just above the National Insurance threshold and paying dividends, you can keep your tax bill low.
Dividends can be paid to anyone who owns shares in a company as long as that company is making sufficient profits. A shareholder can receive up to £2,000 in any tax year tax free (down from £5,000).
Any further dividends paid under the higher rate limit are taxed at 7.5%, so still a relatively cheap way of extracting profits. They are also paid free of National Insurance and are also generally discretionary and so can be fitted to the needs of the individual.
You could decide to put your money into an investment or start-up business to help them achieve growth. If these investments qualify for EIS or SEIS you may also benefit from significant tax savings.
It has become more and more important to ensure that a profit extraction strategy is tailored with careful consideration given to your personal situation.
We can help you design and implement the most tax efficient strategy for extracting profit from your business.
If you are interested in discussing if these and other options please get in touch with Robin Stevenson our tax partner
Robin Stevenson - Tax Partner
Tel: 01825 763 366
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