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Tax-efficient Ways to Extract Profit from your business

Part 1

We’re often asked by our clients how they can best extract profits from their company without falling foul of the dreaded Tax Man.

Completing company accounts isn’t and should never be just about ticking the compliance box for the company, it should also be about the owner’s aspirations.  That’s why during our regular reviews with our clients we look at where the business is, where the Director/Owner is, what they want to achieve and how we can help them reach those goals.

In this installment we look at the most obvious method – Salary.

It seems quite simple, you work for the company, you draw a salary and reduce your profits but is it really that simple?

Paying the Director and/or Shareholder of the company is exactly like paying any other employee.  It is subject to tax and employees NIC and employers NIC depending on the level of salary being paid.  If you don’t know how much salary to pay yourself, we always advise you to pay yourself at least the LEL (£6,240 for 2020/21) to ensure you qualify for any state benefits and of course your old age pension.

There are some advantages:

  1. You reduce the company’s taxable profits and therefore pay less Corporation Tax
  2. You protect your entitlement to state benefits
  3. The tax and NIC is dealt with through the PAYE system so you won’t have to pay the taxes on your self-assessment tax return
  4. Depending on whether you pay any other employees above the LEL you will be able to off-set the employers NIC against the £4,000 employers’ allowance. If you are the sole employee however, you will not qualify for the employers’ allowance and the company will also be liable for 13.8% NICs, however this also reduces your taxable profits

Unlike when you employ a staff member you may not be subject to minimum wage rules if you are not legally treated as a worker for your company, i.e. you don’t have a contract of employment and the majority of work you undertake is the legal duties required of you as a director by the Companies Act.

We are often asked if drawing no salary is a good idea because of current cash-flow.  Whilst it may be a good idea for the company now it may not be good in a months’ time and it certainly isn’t good for you.  Again, this is why it is important that we discuss this during our review meetings.

Paying yourself a salary doesn’t necessarily mean that you have to draw the funds down from the business.  The NET pay can be credited to your directors current account for you to draw at a later date and as you have already paid tax and NIC.  Be mindful also that you can decide how much salary to pay yourself after the company’s accounts have been prepared as you have nine months after the year end in which to calculate it for it to be considered, e.g. if your trading year-end is 31 August 2020 you have until 31 May 2021 to pay the salary.  “Paying” the salary can also mean the date in which it is credited to the DCA.

As the Director of the company you are required to complete a self-assessment tax return and the salary drawn should be shown on the “Employment” section of your return.

If you have not had this conversation with your accountant we would be happy to have a FREE no obligation conversation with you, CONTACT US and we can arrange a video or telephone call at a convenient time for you.

 

Do you want to know how we can help you?

We would be happy to discuss your requirements and put the most appropriate package together for you.

 
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