Tax-efficient tips for extracting profits from your business
Navigating the labyrinth of tax rulings and legislation can be a headache for many small businesses, and you’ll want to be receiving benefits from and making the most of that profit. Here’s our quick list of tips that can really help you extract the maximum value from your business…
Pension contributions are one way to extract profits from your firm while still benefiting from tax relief. Whether it’s an individual or a company who pays into the pension fund, this money is not treated as a benefit – making it tax efficient.
Personal pension contributions are restricted to no more than 100% of an individual’s relevant earnings or £3,600 and, in most cases, tax relief for individuals is available on a maximum contribution of £40,000 per tax year from all sources.
Any pension contributions made by the company (rather than the individual) reduce the company’s overall profit, meaning the amount of Corporation Tax is also reduced. Unlike personal contributions, there is no limit on how much a business can pay into a pension scheme (although still subject to the individual limits), making paying into a pension an excellent way to make the most out of your company’s income. Generally, you are also able to withdraw the first 25% of your pension, once you have reached retirement age, before a tax charge is triggered.
Salary and bonuses
In order to maximise your tax efficiency, it’s often a good idea for directors to take a minimum salary. The first £12,500 of income is tax-free. From there, you’ll have to pay the basic rate (20%) on any salary up to £50,000, and a higher rate (40%) on any salary up to £150,000. There is an additional rate (45%) on anything over £150,000. Note that your personal allowance is reduced by £1 for every £2 you earn above £100,000 each tax year and your entire personal allowance will have been removed if you earn £125,000 or above.
One of the most obvious ways to extract profit is through a bonus. In terms of benefit, it will depend heavily on whether you’re receiving a cash or non-cash bonus. Bonuses paid in cash, or anything that can be exchanged for cash value, will be counted as earnings and will therefore be subject to both PAYE and employee / employer National Insurance contributions (NICs). For non-cash bonuses, the amount of tax is dependent on the item. The government has a comprehensive list of the different rules applied to non-cash bonuses.
Dividends can be paid to anyone who owns shares in a business, as long as the company is making sufficient profit to cover these costs. A shareholder can receive up to £2,000 in any tax year before paying tax – after this, the taxable amount will relate to your income tax band. Dividends are added on top of income so they might push you into a higher tax bracket, which is something worth keeping in mind.
Dividends are exempt from NICs and are also discretionary. This means they can be tailored to suit the individual, subject to the company being able to pay them.
Private investments are a chance to commit your money to another business. This might be an ambitious start-up or a smaller early-stage company aiming to reach their next stage of growth. Investing in a private company means you can be involved during those initial stages of a company’s life and help make a real difference to their development. You may even be eligible for Enterprise Investment Schemes (EIS) or Seed EIS investments (SEIS) which will bring further tax benefits.
For more information on how to develop robust tax strategies for your business, don’t hesitate to get in contact today.