Extracting Profits Tax Efficiently From Your Company
We are asked by clients all the time about “the most tax-efficient way to extract money from their own companies.”
Firstly, it is important to remember that the company is a separate legal entity and any money taken out of the company has tax consequences. It is therefore key to ensure that any 'drawings' from the company are done so in a well-planned and tax-efficient manner. Below I will outline some of the options open to the owner-managed company director/shareholder.
It has always been the case that combining a low salary with dividends is the most tax-efficient way of extracting cash from your company to avoid the national insurance costs, which apply if all cash is taken by way of salary. This is still the position in the majority of cases, despite the changes to the dividend tax regime made in 2016 and the further reduction of the dividend allowance from £5,000 to £2,000 made in April 2018.
But in addition to the low salary/high dividend structure, are there other ways of extracting profits from your company?
Interest on Director's Loan Account
Where a director takes a low salary – say £10,000 and the remainder of his profits by way of dividend, the starting rate for savings income is available - the starting rate band is now £5,000 with a tax rate of 0%.
It is worth considering paying interest on loans made by directors to their companies. The interest paid by the company will need to have basic rate tax deducted from it and the tax paid over to HMRC under the interest payments scheme (form CT61), so there is some admin to sort out from the company perspective. The interest paid should be deductible by the company for corporation tax purposes.
Interest rates of circa 10% could be paid as this would be comparable with unsecured lending by an unconnected 3rd party (a bank for example) to the company.
So, if you have lent money to your company, it might be worth considering the company paying you interest on that money. Depending on your individual circumstances, it may be a way of receiving some tax-free income, with the company obtaining tax relief on the payments to you
Having the company (as your employer) make pension contributions for you is a very tax-efficient way of extracting profits from the company. The annual allowance is £40,000 per annum and if you haven’t maximised contributions in previous years, there may be some unused relief to utilise as well. With the pension freedom legislation introduced many years ago, pensions have made a significant comeback in an individual’s personal financial planning and wealth management, so should not be overlooked.
The company obtains tax relief on the pension contributions it makes to your pension fund, and you are not taxed on such contributions. The pension fund grows tax-free, and you can access it from age 55 under current rules.
It’s important to take advice on pension planning so talk to your relationship partner, or if you aren't a client, get in touch with us for more details.
Relevant Life Policies
Many company directors have life assurance policies which they pay for personally. Such premiums are therefore coming out of taxed income with no tax relief on the premiums.
Under the Relevant Life Policy Regime, the company, as your employer, can pay the premiums and obtain tax relief on the payments. So again, a much more tax-efficient way of paying for protection policies.
Again, it is important to take advice on such matters to ensure the policies are set up correctly, so talk to your relationship partner if this would be of interest.
If you are thinking of “going green” to do your bit for the environment, why not consider the electric vehicle option. If the company purchases a new electric vehicle for you to use, there are some significant tax breaks to be achieved including the company obtaining tax relief on the cost and the Benefit in Kind charge on you for the use of the vehicle being very low – click here to see our recent article on the electric vehicle tax advantages.
Low C02 Emission Cars
If you are looking at a low emission vehicle for the children, it might be worth considering the company buying it and suffering the benefit in kind (BIK) charge. The insurance is usually the biggest cost for a young driver, so why not have the company pay for the insurance (and get tax relief on it!). If the CO2 emissions are low, the BIK charge will also be low, so it may be more advantageous to have the company pay the car expenses and you suffer the tax on the BIK charge.
Again, it’s important to check the figures, so talk to your relationship partner if this might be of interest. If you would like to get in touch with me directly about any aspect of this article, send an email to email@example.com or click here to get in touch with a member of the team today.