Profit Extraction

If you are operating as a sole trader/partnership, you will be taxed on all profits arising, regardless of whether you need or extract the cash. That may be the best option for you, however, it may be that restructuring could improve your tax-efficient extraction options, see Restructuring for more information.

There are various options available for cash extraction from a company, including but not limited to:

Dividends vs Salary

Although the rate of tax on dividends has risen over recent years, generally coupling an employer NIC threshold salary with dividends is more tax efficient than taking salary/bonuses alone.

That is not always the case, for example, if R&D relief is claimed on salary costs, an increased salary may be a better option.

We are aware of all the nuances that come with remuneration planning and can fully assess your dividend and salary package to ensure the optimum position is achieved.

Interest on Directors' loans

Did you loan cash into the company to fund start-up, growth, or working capital? If so, not only can you extract that cash tax-free, but you could also charge interest on any balances outstanding.  Charging interest is very tax efficient, generally even more so than dividends.

Payment from the company for use of personal assets

Do you personally own the trading premises or other trading assets? If so, charging market value rental payments for the company’s use of these assets is very tax efficient and, similarly to loan interest, generally more so than dividends.

Maximising pension contributions comes with many tax benefits; there are no income tax charges for contributions within specified allowances.  If paid by a business, the business will get tax relief on contributions, the value of the pot will remain outside your Inheritance Tax estate and income and gains on investments within the pension will roll up tax-free.

Does your spouse have a lower income than you?  If so, it may be that income can be shifted to them to make use of lower tax rates and allowances - perhaps by ‘gifting’ some shares to them, so they can receive dividend income or transferring other income-producing assets to them.

Do your children and/or grandchildren have limited income? If so, rather than having to take income at your own marginal tax rates to fund maintenance costs such as school fees, general subsistence, etc, it may be possible to shift some income to them and make use of lower tax rates and allowances. This may be by gifting shares or assets directly to them, or to a trust for their benefit.  Note that this is not possible for your minor children (under 18 years old), grandchildren are not limited in the same way.

Many business owners take more cash than they need to fund their lifestyle. Often the balance accumulating is therefore invested. This may be because they do not want the cash to be left in the company and be exposed to trade risk or because there are several shareholders all with different needs.

It may be possible to restructure so that the cash can be ring-fenced away from the business tax-free and invested in a separate company or companies, therefore allowing the total value to be invested, rather than that being depleted by income tax.

This form of restructuring also offers a very tax-efficient roll-up of income and gains arising from the investments.

See Financing, which sets out the potential tax benefits that can be achieved for investors in your business.  Those same benefits may be available to you if you invest in certain qualifying companies, therefore reducing your tax bill.