How to extract profits from your company

Whether you are considering extraction of profits from a company on a tax year basis or aligned to the company year end, there are a number of issues that should be considered. Mike Scott, tax manager at HSJ Accountants, looks at a few options to extract profits from a company tax efficiently.

Salary
National insurance contributions are expensive (employee and employer amount to 25.8 per cent) but salary can be deducted from taxable profits in the company.

Bonuses
Where annual bonuses are payable, the bonus must be due and payable before the company year end, even if the specific amount has not been finalised. This way you qualify from tax relief against the profits of the period. The bonus must always be paid within nine months of the year end to secure the tax deduction in the company.

Dividends
These are subject to a lower rate of income tax than other sources of income, though this is mitigated by the company not being able to claim corporation tax relief. The main advantage of payment by dividend as against salary is that no national insurance is payable on dividends.

Benefits in kind
Some benefits in kind are still tax efficient, including the provision of a company mobile telephone and a car with low emissions. Such cars may also qualify for a 100% first year deduction for capital allowances.

Pension contributions
The same test applies to pension contributions for director shareholders as applies to the spouse of a shareholder/director. Provided the total salary package (ignoring dividends) is reasonable for the input/work of the director into the company, then all salary plus pension contribution should be allowed against profits for tax purposes.

Remember that there is an annual limit on pension contributions, which is now just £50,000, though unused limits from the previous three tax years can be used. Contributions in excess of this will trigger a tax charge on the member.

These are just a few tax planning tips from our free tax planning guide.

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