Extracting profit – save on tax
Taking a profit is arguably the whole point of running a business. But what is the best method of doing it? There are numerous ways of extracting profit from your business, each of which has its own implications for the tax you pay, and for the business itself.
Corporation tax is due on your company’s profits, while personal tax applies to what is drawn out of the company by means of a salary, bonus, or other form of remuneration.
Dividend or salary/bonus?
The question of whether it is better to take a salary/bonus or a dividend can be a difficult one, and still requires careful consideration. A dividend is paid free of national insurance contributions, which would typically cost 13.8%, or even up to 23.8% in combined employer and employee contributions. The effect can be a considerable saving, but there can also be an increase in the value of the shares of your company if valuation is ever necessary (eg. for inheritance tax). 5 April 2009 is your last date for paying a 2008/09 dividend, and any higher rate tax on that dividend will not be due until 31 January 2010.
You may also want to consider alternative means of extracting profit, including:
Are you making use of tax-free allowances such as mileage payments when you drive your own car or van on business journeys? The statutory rates are 40p a mile for the first 10,000 miles and 25p a mile above this. If you use your motorbike the rate is 24p a mile, and you can even claim 20p a mile for using your bicycle!
If you have young children, you are entitled to tax-free childcare vouchers of up to £55 a week, provided by your company. If your spouse or partner also works for the company, the allowance is doubled. (Your children also have their own personal allowances, CGT exemptions and tax rate bands, so depending on your circumstances, it may be possible to use these to maximise family income and wealth.)
Pension contributions can be a tax-efficient means of extracting profit from your company, as long as an individual’s remuneration package remains justifiable.
If property which is owned by you is used by the company for business purposes, such as an office building or car park, you are entitled to receive a market rent. You must declare this on your tax return and pay income tax, but a range of costs connected with the property can be offset. On the other hand, receiving rent can mean a bigger capital gains tax bill if/when you come to sell the property, so care needs to be taken weighing up the pros and cons.
Talk to us about the best ways to extract profits from your business tax-efficiently.