7 ways to extract profits from your small company and minimise the tax you pay

Posted on 4th May 2021 by David Rudd

The 2021-22 tax year has started and it may be prudent to review the way you extract funds from your company, beginning to plan how you can save on both company and personal tax.

Here are 7 ways to extract profits, whilst minimising the cost to your company at the end of the 2021-22 tax year.

 Salary

Salaries are tax deductible in computing the company’s taxable profit, but can attract personal income tax, employees National Insurance and employer’s National Insurance.  Despite this, there are still compelling reasons to keep salary levels at an amount that counts as a qualifying year for State Pension and other State Benefits. We can advise you on the optimal salary level for you and your family, just contact us.

Avoid The 32.5% Dividend Tax Charge Where Possible

As long as the dividends you take during the 2021-22 tax year (including all other taxable income) do not push you into the higher rate income tax band, dividends you receive from your company – in excess of the £2,000 tax-free amount – will be taxed at 7.5%. If the higher rate band is exceeded this additional tax charge increases to 32.5% on dividends that form part of the higher rate tax band. We can estimate your income from all sources and set your dividend policy at an amount that avoids this higher 32.5% tax charge or keeps it to a minimum.

Rent Your Home Office to The Company

If you run your company from home, you can consider renting your home office to the company. The rent, which should be at a commercial rate, is deductible in computing the company’s taxable profits. However, you must pay income tax on rents received in this way and declare them on your self-assessment tax return. On the plus side, there is no National Insurance to pay.

Benefits in kind Tax Exemptions

There are a number of tax exemptions for benefits in kind, such as those for mobile phones and trivial benefits, which enable you to extract profits without an associated tax or National Insurance liability.

Using Your Company for Pension Contributions

You can also extract profits in the form of pension contributions as your company can pay contributions into a pension plan for you (as long as your available annual allowance has not been used up). Pension contributions are usually tax deductible in computing the company’s taxable profit and initially income tax free.

Directors’ loans from your company

If your need money for a short time, taking a director’s loan can be tax efficient. You can borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the balance exceeds £10,000 at any point in the tax year or if you do not repay the loan within nine months and one day of the end of your accounting period.

Interest on loans to your company

If you lend money to your company, there is no reason why you should not charge interest. Interest would not be subject to National Insurance deductions and may be covered by an annual savings allowance. In which case no income tax charge would arise.

BUT there is always the option of not extracting profit and retaining profits in your company

Extracting profits from your company may trigger a further tax and National Insurance charge. If you do not need the profits for personal use, consider leaving them in the company to extract later when this can be done more tax efficiently.  Remember that profit left in your company is at risk, should anything adverse happen to your company.

Need help?  Call now so we can help you consider your options

Remember, the Steven Burton & Co team have many decades of experience between us helping business owners just like you. If you need a sounding board, some advice or a steer in the right direction, whether it’s small company tax advice or anything else, get in touch.

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