How to Extract Profits from your Business Tax Efficiently

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.

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How Making Pension Contributions for your Family Members can help save you tax.

Many people are unaware that under current legislation, you are allowed to contribute up to £3,600 gross (£2,880 net of basic rate tax) into a registered pension scheme regardless of your level of income or age.

Therefore, if you wished to contribute into a pension scheme for your non-working Spouse or children, they are then deemed to have made contributions net of basic rate tax even if they are non taxpayers.

Example:

Bobby wishes to increase his family’s pension fund available when they retire.  He makes a contribution of £2,880 into his non-working wife’s pension fund.  The £2,880 contribution is actually worth £3,600 in the scheme and he is able to obtain a tax saving of £720 by doing so.

Bobby also contributes the same amount of £2,880 into each of his four children’s pension schemes which as before, is worth £3,600 in each of their schemes, receiving a further £720 tax advantage in each scheme (£2,880 in total).

The other benefit from this type of planning is that as the children will have started their pension scheme running at a younger age than the typical age of individuals starting a Pension, (around 30 years of age), they will have a considerably larger pension when they come to retire.

For more information please contact tax@taxationuk.com, visit our website www.taxationuk.com, or call us free on 0800 690 6537.

The Tax benefits of Children’s Bonus Bonds

Children’s Bonus Bonds are a tax-free investment issued by National Savings.

The maximum investment in the bonds is £3,000 per issue, with a minimum investment of £25 per issue.  The term of investment is a minimum of five years.

The benefit of Children’s bonus bonds are that they allow investments to be made in the child’s own name, along with the fact that there is no tax to pay on the interest or on any bonuses earned.

This is a useful product for generating income for your children and developing a lump sum saved for your children's future.  This investment is not affected by the rules concerning income generated by gifts from parents for children.

For issue 35 bonds, each £25 unit earns a current interest rate of 2.50% AER, guaranteed over five years and a five-year bonus.

Example:

John invests £3,000 into an issue 35 Children’s Bonus Bond for his two-year-old son Oliver. The bond earns interest at a rate of 2.50% AER guaranteed over five years (as mentioned above).

After five years the bond will be worth £3,394.22. John has earned tax-free income for his son in the sum of £394.22.

For more information please contact us at tax@taxationuk.com or visit our website www.taxationuk.com

Rental Income vs Other Investment Income

Despite the fact that there is no national insurance on rental income it could prove to be a source which is a lot less tax efficient than income from investments such as Company Shares with a high dividend yield,

This is a particularly important Tax Planning Point to keep in mind if you are weighing up the pros and cons in investing in Property against investing in other investments.

  

This is not to mention that if you hold your shares or money in an ISA or Pension, then any Dividends and Interest earned on them are completely tax free.  

To emphasise this look at the following example:

Mr X receives £5,000 of dividends from his shares in Company A.  Mr X has other annual income through PAYE totaling £15,000.  Mr X has no further tax to pay on the dividends.

However, if Mr X, instead of the Dividend Income, receives £5,000 of Rental Income.  He will have additional tax of £1,000 to pay.

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Own a Property with your wife or Civil partner? How HMRC's Form 17 can help you save tax.

If you own a property jointly with your wife or Civil Partner, then a declaration can be made via Form 17 to split the beneficial share of a property. This means that any share of the rental income earned on the property or capital gains resultant on the sale of the property, can be split into shares other than 50/50 between the both of you (e.g. 80/20). No split other than 50/50 can be accepted until a declaration is required.

This is very helpful if one of you is a higher rate tax payer and the other a lower rate tax payer, as it will allow you to attribute a higher percentage of rental income or Capital Gain to the lower rate tax payer and therefore pay more income tax at 20% rather than at 40% or Capital Gains Tax at 18% compared to 28%.

The form has to be signed and dated by both spouses or civil partners, but can then be sent to the tax office of either spouse or civil partner.

Once a declaration is made it remains in force until the couple's interests in the property or income change, or they stop living together as a married couple or as civil partners of each other.

A copy of Form 17 can be downloaded from HMRC’s website.

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Residential Lets - The benefits of using Floor Tiles instead of Carpet

Most Landlords are unaware that there is a benefit in replacing carpets in their furnished properties with floor tiles.  As most people will be aware, any replacement carpet expenditure cannot be claimed as an expense deduction against the rental income, as the costs are attributed within the normal Wear and Tear allowance.  However, this is not the case for Floor Tiles.  Any expense incurred on replacing carpets with Floor tiles can be claimed as an expense against the rental income.  This will also not affect claiming your normal wear and tear allowance.

To find out more contact us on 0800 690 6537 or email tax@taxationuk.com

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