Depending on the status of your business, taking profits out of the business can be simple or can have added complications.
Where you are a sole trader, the profits of the business belong to you so you are taxed on the profits made (subject to a few tax adjustments). The obvious incentive is to make sure that you are capturing all your relevant business expenses through the books to reduce the profits. Do remember to save some funds for the tax.
Where you are a partnership, broadly speaking, the same applies although there needs to be a conversation with your partners about how profits are shared and drawings can be made.
However where you trade through a limited company, the business profits being generated are those of the company rather than your personal profits. This means consideration has to be given as to the split of the monies taken out of the business.
Ways to take money out of your business
As a general rule, the most usual ways to take money out of a limited company are:
Salary
Dividends
Benefits in kind
Loan repayments
Interest charged on any loans to the company
Pension contributions
Most owner managed business owners pay themselves a mix of some/all of the above.
Salary
Normally a salary would be paid, at a level where some/all of the personal allowance is used up. Salary payments need reporting to HM Revenue & Customs through a PAYE scheme. Paying a salary effectively means (depending on the amount) you will get credit for the State Pension, Corporation tax relief will be due on the payments and if below the personal allowance, no Income tax will be due. Obviously if you have other income, such as a second job or pension, then extra consideration will need to be given.
Dividends
Dividends are a good way of extracting profits, they don’t qualify for tax relief but the rate of tax for a basic rate taxpayer is very low. Dividends can only be paid out of distributable profits and so it is important that you can demonstrate that profits were available from which the dividends were paid.
Benefits in kind
Benefits in kind again can be a good way to take profits. Company cars and health insurance are two examples. Using benefits in kind means that you will need to report the value of them on form P11D after the tax year has expired and potentially Class 1A National Insurance may be due.
Loan repayments
Where you have loaned the company money, this can be paid to yourself with no tax consequences. No corporation tax will be due on the repayments but no Income Tax is due. It is important to note that this is where the company owes you money and not the other way round!
Interest
Interest can also be charged on any loans you have made to the company, the rate of interest you can charge can actually be quite high. Ultimately if you ask yourself what sort of interest would you want if you were to lend as an unsecured creditor of a small/medium business, the answer would generally be quite high and so we have plenty of experience of justifying such interest charges. Consideration needs to be given as to the timing of the interest charges and them being reported to HM Revenue & Customs.
Pension contributions
Pension contributions are a really tax efficient way of taking profits out of the company. The company can make employer contributions which if paid by the company’s year end date, generally should qualify for corporation tax relief. Depending on your personal circumstances, the amount that could be paid can often be quite high. Currently the annual limit is £60,000 and you could have some brought forward amounts from earlier years. Care needs to be taken if you are a high earner and so advice needs seeking before committing to pension contributions.
Corporation tax rates are now between 19% and 26.5%, so there is a wealth of opportunities to reduce the amount you pay with careful planning and consideration.
One final point to remember is that if you take money out of the company without deeming it to be one/some of the above, it is effectively a loan to you which will need to be cleared. Additionally if it is outstanding 9 months after the year end, there are added tax consequences.
It is always best to check things out, so please get in touch to discuss your individual circumstances.
For accounting advice that's tailored to your business, get in touch.
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