Extracting Profits from The Family Company
Irrespective of which industry your business is in, the age-old question of how to extract profits in a tax-efficient manner is raised year after year.
Many of our existing and prospective clients set up companies thinking that they can dip into the company’s money as and when they like, mainly because that is how they acted as sole traders. Unfortunately, such thinking is fraught with danger and can lead to financial problems and tax issues.
When a limited company is incorporated, it becomes a separate legal entity in its own right. The assets and profits belong to the company, not the owners or shareholders. Sole traders, on the other hand, own the business and assets, and the profits are theirs. Any profits which the company makes are owned by the company, not by the directors. The company can share the profits with its shareholders if the directors decide that it is appropriate to do so.
So, how can money be taken from the company in a tax-efficient manner in 2021/22?
Usually, in a combination of ways.
Salary and Benefits in Kind
The most obvious way to extract profit from a limited company is by salary. As a UK resident, a tax-free personal allowance of £12,570 should be available. In order to maintain a national insurance record for state pension purposes, a minimum salary of £8,840 per annum is recommended without liability to pay national insurance on the part of the employer company or employee.
Benefits in kind in the form of company cars and private health insurance can also be considered in creating taxable income. There are various tax-free benefits such mobile phones and tax-free mileage expenses which should also be discussed with advisors and availed of.
Directors tend to be shareholders. Profitable companies pay corporation tax at 19%. Taking money out of the company via dividends occurs after corporation tax has been provided. A combination of salary, benefits in kind and dividends will provide the most tax-efficient extraction of funds. In addition to the personal allowance of £12,570 mentioned above, the first £2,000 of dividends received are tax-free. For dividends in excess of £2,000, tax bands apply as follows.
- Basic Rate 7.5% (£37,700 of income after utilising the personal allowance)
- Higher Rate 32.5% (£37,700-£150,000)
- Additional Rate 38.1% (Over £150,000)
It should also be borne in mind that the personal allowance of £12,570 is reduced by £1 for every £2 of income over £100,000. Where total income exceeds £125,140, the personal allowance is therefore lost.
The dividend income is added to other taxable sources to determine the applicable tax band as tax may be paid at more than one band.
Other ways to extract profits from the company, which should not be overlooked, are as follows:
Profits can be extracted by the company making pension contributions within limits and are fully deductible as an expense of the company.
Directors Loans from The Company
Should the director require loans for a short time, up to £10,000 can be withdrawn tax free for up to 21 months. Care needs to be exercised if the loan exceeds £10,000 or if the loan is not repaid within 9 months of the accounting year end.
Interest on Loans to The Company
If money is loaned to the company, the director/shareholder is entitled to charge interest which, although taxable as income, will avoid National Insurance.
Charge the Company Rent
If the director owns the company premises or, indeed operates from home, a market rent can be charged to the company. Once again there may be income tax payable on the rental profits, which should be considered.
The above are the more common means of extracting funds from a limited company and should be considered together with personal circumstances and other taxable income when deciding on a tax-efficient remuneration package for directors, employees and shareholders.
As always, any changes should be discussed with your tax advisors and accountants.
If you would like to raise anything we’ve discussed in this article, please call us on 020 8515 2975 or email us at firstname.lastname@example.org and talk to our expert team. We’re here to help.
The content of this article is for guidance only and shall not constitute advice. Please seek independent advice or contact GuildHUB for information about its services.