There are a number of ways in which profits can be extracted from a company; for example, salary/bonus, dividends and loans. Each method of profit extraction has different tax implications for the company and the individual. The best method, or combination of methods, will depend on the particular circumstances.
Significant tax savings are possible where:
a remuneration strategy is drawn up in advance of any amounts being withdrawn; and
that strategy is implemented correctly.
It is assumed that:
the individual is a director of and shareholder in the company:
the individual is actively working for the company;
both the individual and the company are resident in the UK for tax purposes; and
neither the ‘IR35’ rules nor the disguised remuneration provisions apply.
Tax rates and allowances are for 2021/22 and for the financial year 2021 unless otherwise stated.
The correct remuneration strategy will depend on the circumstances. Once agreed the remuneration strategy, individual needs to make sure that they understand the importance of sticking to it: an unexpected withdrawal could give rise to a large tax bill.
In drawing up the remuneration strategy, bear the following questions in mind:
How much does the individual need to take from the business?
Tax can be at least deferred, and in some circumstances saved, where some of the funds are left within the company. Once you know how much you needs after tax, we can work out the most tax efficient way of getting this to you.
Do you have annual earnings of at least £6,240?
It is common for a salary in excess of the Class 1 NICs Lower Earnings Limit (£6,420) to be paid. This helps the individual build entitlement to state benefits. There is no liability to employer’s NICs where the salary is £8,840 or less, no liability for employee’s NICs where the salary is £9,568 or less and no liability to income tax where the salary is £12,570 or less.
Is the company expected to have distributable profits out of which dividends may be paid?
Dividends can be a tax-efficient method of profit extraction.
Is the individual owed funds by the company?
Some or all of the loan could be repaid tax-free to the individual, or the company could pay interest in respect of the amount borrowed. Interest is tax-deductible for the company and does not give rise to a NICs bill for the company or the individual.
Does the company use an asset owned by the individual?
This is most likely to be land and buildings. Rent could be paid to the individual. Any rent paid is liable to income tax in the hands of the individual, after the deduction of allowable expenses, but no NICs are due; and for the company, the payment is tax deductible and doesn’t give rise to a liability to employer’s NICs.
Does the individual want to save for the future?
Pension contributions are tax-deductible for the company and tax-free for the individual, subject to meeting certain conditions.
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