Extracting money from company profits incurs a charge – and when large sums are involved, this charge can be significant. Needless to say, extracting money from profits in a tax-efficient manner is an important consideration, particularly for family businesses and owner-managers. Profit extraction planning could help you to access more of your hard-earned wealth.
Many business owners extract profits in the form of additional income (e.g. bonuses) or as dividends. Bonuses are liable to income tax and NICs (National Insurance Contributions), but both charges are deductible for corporation tax purposes. Dividends are not corporation tax deductible, but have the advantage of not incurring NICs.
The tax free allowance for profit extraction through dividends is only £5000. Beyond this threshold the tax charges increase from 7.5% to a maximum of 38.1%.
Assuming you are both business owner and shareholder, other methods of profit extraction include: charging interest on a loan you made to the company; charging rent for your company to use your premises (assuming you are the property owner); selling assets to the company (which will trigger capital gains tax, but which can sometimes be reduced to just 10% through Entrepreneur’s Relief).
Of course, different structures can help you to reduce your tax burden still further. For example, going through a sole trader, partnership or LLP structure can give you access to favourable rates of tax.
We can help family businesses and owner managers of profitable businesses to reduce their exposure to tax through profit extraction planning.
Every strategy will be different, and we will work with you to arrive at a tailor-made solution, which will often include providing access to tax efficient structures vetted and approved by ourselves and our partners.