Tax Efficient Profit Extraction

Newsletter issue -June 2011.

As a company owner you can choose how to extract the profits from your company, and by making the right choices you can minimise the tax and NI paid by you and the company.

The Taxman would like you to take all the profits in the form of a salary and possibly a bonus, as these carry the highest NI charges and ensure the tax is deducted under PAYE before you get your hands on the net income. It is good practice to pay yourself at least a small salary that is covered by your personal allowance (£7,475 for 2011/12), as this makes the best use of your tax free allowances. However, the maximum salary you can take so that neither you nor the company pay NICs is £7,072 in 2011/12, as the threshold for NICs is lower than the tax free threshold. You can get credit for NI contributions without actually paying any as long as the salary is above £5,304 in 2011/12.

Most company owners extract any further amount they need in the form of dividends. If the gross dividend is less than the basic rate limit of £35,000 you will pay no further income tax on that income, and no NI charges. However, larger dividend payments will create an additional tax charge in your hands of 25% (for 40% taxpayers) of the net dividend or 36.1% (for 50% taxpayers).

If you don't actually need the income now consider extracting the profits in another form such as employer pension contributions although you will have to pay income tax on the pension you eventually receive.

You can also charge a rent for assets you own which the company uses (although this could affect the availability of entrepreneurs' relief on a sale of that asset). These assets could be real property (land) or intellectual property (e.g. patents). If you lend funds to the company it can pay you a commercial rate of interest on that loan. These profit extraction methods are free of NI charges.

We can discuss other methods of extracting profits, perhaps using your family members. Please contact us for specific advice in your own circumstances.

What our clients say about us...

  • "Paul has provided accountancy services to my company for 2 years now. I can recommend Paul very highly; his skills as an accountant are highly detailed and professional and he is always available to provide advice. One aspect of the way Paul works that I greatly appreciate is a preference to meet face to face when there is a detailed conversation to be had. I personally find this more productive and is a benefit of working with a small accountancy firm that you wouldn't get with the large faceless providers."

    ALISTAIR FAIRWEATHER - PROGRAMME & PROJECT MANAGER, DELIVERING/RESCUING I.T. 7 BUSINESS CHANGE WITH BUDGETS UPTO £50M INC SUPPIER MANAGEMENT

  • "I couldn't ask for more from Paul as an Accountant. Paul has been accountant to Work Relief Charity Recruitment for just over a year now and is proving an invaluable asset. Accurate, knowledgeable, flexible with an emphasis on service delivery, I would recommend Paul's services to any organisation looking for an accounts professional."

    Neil Price - Managing Director at Work Relief Charity Recruitment

  • "Paul was a referral from a family member when I started my business 2 years ago. As this was the first time I had ever run my own company I was totally clueless over the financial side of matters and was worried that I may have made mistakes in any of my accounting. I needn't have worried as after enaging Paul for a set monthly fee he was always there on the end of the phone for all sorts of questions I had and no matter how trivial they were Paul gave me all the information I required and more and did an excellent and painless job at the end of my first year! Couldn't ask for any better to be honest. Just two words - hire him!!!"

    Lee Westrap MBCS - Director - Bulldog IT Services

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Booth & Co  |   The Hermitage  |   15a Shenfield Road  |   Brentwood  |   Essex  |   CM15 8AG        Telephone: 01277 224666    |   Email: info@boothandco.co.uk