Extracting Profits from your small business
One of the most important issues facing owners of small businesses is how can they extract funds from their business in the most tax efficient manner.
The guide below explains four of the most common ways. All rates and thresholds apply to the 2018/19 tax year.
You as a director can become an employee of the business and pay yourself a wage. To do this, you must ensure the company sets up a payroll scheme. It is common practice for directors to pay themselves a salary of between £6,032 and £8,424 per annum.
Neither the director or the company will pay national insurance contributions however the level of salary will ensure that your salary will count towards state pension contributions.
It may also be possible to employ other family members and use all available personal allowances. The wages paid to family members need to represent a fair market value for the work performed.
Providing the company has enough reserves the director can authorise the payment of a dividend.
Every individual has a tax-free dividend allowance of £2,000. Any dividends above this limit are taxed at the following rates depending on what tax band the income falls within;
Up to £34,500 7.5%
Between £34,501 – £150,000 32.5%
Over £150,000 38.1%
It is also possible to pay family members a dividend and utilise their allowance providing they own shares in the company. It is important to seek further advice before issuing further shares or gifting you shares to family members.
As your employer the business can pay contributions towards your pension.
This has the advantage in the contributions are a tax-deductible expense for the business so long as the contributions are reasonable for the work performed.
No tax charge falls on you personally providing the contributions lie within your annual allowance, typically £40,000. This allowance may be restricted if your annual income exceeds £150,000 or you have already taken some pension benefits.
MHA Moore and Smalley have a financial planning department who can provide further advice on investing in a pension scheme.
Loans to the company
If the company owes you money it can pay interest to you at a commercial rate. The interest is a tax-deductible expense for the company providing the original loan was for a business purpose.
The company must deduct 20% tax from the interest and pay this to HMRC. However, providing the interest you receive is less than £1,000 (£500 for higher rate individuals, no allowance if you earn more than £150,000), you can reclaim the tax deducted.
In addition, if you earn less than £11,850 in this tax year HMRC allows a further £5,000 savings allowance.
Additional ways of extracting funds include the rental of property to the business and tax-free benefits. Please contact MHA Moore and Smalley on 01772 821 021 or email Ben Gilbert for further details.