Extracting profits from a Personal or Family company can be done in various ways and you should always consider the most tax efficient way of taking out the profits in respect of both the company and your personal tax situation.
No two
situations are the same so it is always best to seek professional advice before
deciding on the best policy for you.
One of the
most common and beneficial strategies in respect of extracting profits, is to
pay a small salary of above the lower earnings limit (£109 per week for
2013/14) and below the secondary threshold for National Insurance purposes (£148
per week for 2013/14). This ensures
your entitlement to the state pension and contributory benefits but can be paid
to you free of tax and National Insurance.
Profits
above this threshold should then be taken out from the Company as dividends, as
long as the company has sufficient retained profit to cover the amounts.
This strategy
is usually a lot more efficient in terms of tax than by simply paying a salary
or bonus from the Company as no National Insurance contributions are due on the
dividends. The dividends will also not
attract any further tax on you personally, until your basic rate limit is
reached.
The voting
of the dividends must be properly prepared and in accordance with company law.
The
payments to you from the Company in respect of Salary payments and Employers
NIC contributions are fully deductible in calculating the Company’s profit for
Corporation Tax.
Example:
Bobby is the sole shareholder and director of OGGY Ltd. He pays
himself a salary of £8,000 a year from the Company and has other income of £2,000
a year.
The company has profit before tax of £20,000, which he wants to
withdraw.
If Bobby elected to take the money as an additional salary he would be
able to pay himself only £17,575 from the profits, as the remaining £2,425
would be chargeable to employers NIC (£20,000 X 100/113.8).
Bobby would then need to pay 20% tax on the salary amount received above
his personal tax allowance for the year, (£9,440 2013/14), as his income has
already surpassed this amount (£8,000 normal Salary & £2,000 other income),
the full amount would be taxable at 20%, totaling £3,515. Bobby will also have to pay employees NIC (12%
2013/14) of £2,109.
Therefore the total tax paid in this scenario is £0 in Corporation
Tax, £3,515 Income tax and £4,534 in NIC. This leaves Bobby with a net amount after tax
of £11,951, from the original £20,000 of Profit.
However, if Bobby was to take the £20,000 as a dividend, corporation
tax payable would increase to £4,000 (20,000 X 20%). This leaves £16,000 available for
distribution.
As Bobby will be taking out the monies as a dividend, there will be no
further charges in relation to NIC, either Employers or Employees.
As UK Dividends are automatically paid net of a 10% tax credit, Bobby
would be treated as receiving a gross dividend of £17,777. Tax of 10% (£1,777) would be due on the
dividend, but this is already matched by the tax credit (£1,777) attached to
the dividend paid. Therefore Bobby would
not have any further income tax to pay on the dividend received, as he is well
within his Basic Rate Tax Band.
The total tax paid in this scenario is only £4,000. Bobby, therefore, retains £16,000 of the
profit.
As you can see in this scenario, with a small amount of careful
planning Bobby is £4,049 better off a year by taking a dividend rather than a
salary or bonus.
To discuss the best efficient way to extract profits from your
business please call us on 0800 690 6537 or drop us an email to tax@taxationuk.com.