How Do I Take The Profits Out Of My Business Tax Efficiently?

(melodic sting)
(dinging) – People run businesses
for a variety of reasons, but making a living is high
up the list for most people. (melodic sting)
(dinging) If your business operates as
a partnership or sole trader, you’re taxed on the profits it makes, adjusted for any expenses
which aren’t tax deductible. It makes no difference to your tax bill whether the profits are
held in the business or extracted for your personal use. When you work through a limited company, the total tax paid by the
company and the shareholders will depend on the methods
used to extract profits, and the amount withdrawn. The tax rates and thresholds
used in the following examples apply to the 2018/19 tax year. (melodic sting)
(dinging) Paying yourself an annual salary of between 6032 pounds and 8424 pounds counts towards the state pension
and other state benefits, but neither you or your company have to pay any national
insurance contributions, NICs. Any salary above 8424 pounds would result in employer’s
NICs being payable at 13.8%. Employees’ NICs would also
be payable above this amount at 12% up to a limit of 46,384 pounds. Above this threshold the rate of employees’
NICs payable falls to 2%. Your employer’s NICs liability can be set against the 3000
pounds employment allowance, if your company employs more than just you as the sole director and pays each of those
additional employees more than 8424 pounds. (melodic sting)
(dinging) This can be a good way to spread the income from the
business around the family, and use all available personal allowances and lower rate tax bands. However, the wage paid to a family member must represent a market
rate for the work performed, for example you shouldn’t pay your son a senior executive salary if
he’s working on reception. (melodic sting)
(dinging) The company must have sufficient reserves before the directors authorise
a dividend to be paid. If there are insufficient
reserves available, any dividends paid may be re-categorized as loans to the recipients. Each individual is entitled to an annual tax-free dividend
allowance of 2000 pounds. Dividends received above this limit are taxed according to the tax
band the income falls into. These tax bands can be expanded if you make pension contributions
or gift aid donations out of net income. Spreading dividend income
among your family members can allow them to use their 2000 pounds tax-free dividend allowance. However, those family members need to first hold shares in the business which entitles them to
receive the dividends. Dividend income is taxed
at the following rates. For Basic-rate taxpayers the rate is seven and a half percent, for Higher-rate taxpayers
it is 32 and a half percent and Additional-rate
taxpayers pay tax at 38.1%. You can give away shares to your spouse or civil partner with minimal tax implications, but do seek advice before doing this. To be effective for tax planning purposes the shares should carry
a full quota of rights, including the right to vote,
receive a variable dividend and share in the capital of
the business on a winding up. Shares given to employees
can be subject to income tax as employment-related securities, but there’s a general
exemption from that legislation for gifts made as part
of a family relationship. As an alternative to giving shares, family members could subscribe directly for new shares to be
issued by the business. (melodic sting)
(dinging) Where the business pays pension contributions as your employer, those payments are tax
deductible for the business, so long as your total remuneration package is reasonable for the work
you perform for the company. Where the total pension contributions paid by you or on your behalf lie within your annual allowance, which is usually 40,000 pounds a year, there is no tax charge when
the contributions are paid. If you’ve already taken
some pension benefits, or your annual income is
150,000 pounds or more, you may have a restricted
annual allowance. Seek expert advice before
investing in a pension scheme. (melodic sting)
(dinging) You can take advantage
of tax-free benefits up to the following limits: Non-cash gifts up to 50 pounds per item; One mobile phone per employee; Loans worth up to 10,000
pounds per person; And employer-provided training on which there is no monetary limit. The non-cash gifts can be items such as wine, flowers, chocolates,
vouchers or a gift card, but it must not be given
as a reward for services or be in any way contractual. Vouchers and gift cards must
not be exchangeable for cash. Company directors and their family members can receive up to 300 pounds of tax-free gifts from the
company in total per tax year. (melodic sting)
(dinging) You can borrow money from your company, if this is permitted by
the company’s articles and by company law, but there are tax
implications to consider. Where the loan exceeds 10,000 pounds at any point in the tax year, you will be taxed on deemed interest calculated at 3% of the total loan, less any interest you actually pay. The company will also pay 13.8% NICs on that net deemed interest. A loan of any value will
generate a corporation tax charge at 32.5% on any amount still outstanding more than nine months after the
end of the accounting period in which the loan was advanced. This tax is payable by the company, but it can be reclaimed
once the loan is repaid subject to certain rules. Where the loan repayments
are made out of taxed income, the loan is not treated
as a continuous loan. Be aware that loans to an
employee through a third party, such as an employment trust, may be categorised as
disguised remuneration and be subject to PAYE and
NICs as if the loan was salary. (melodic sting)
(dinging) If your company owes you money, perhaps as undrawn dividends or salary, it can pay you interest on those
funds at a commercial rate. Such interest is tax
deductible for the company, if it uses the funds
for business purposes. You should draw up an agreement between yourself and the company to formalise the payment of interest, which sets the interest rate and the terms for the loan repayment. The downside is the company must deduct 20% tax from the
regular interest payments, and report and pay
those deductions to HMRC on form CT61 each quarter. Where the total interest
you receive in a year is less than your savings
allowance of 1000 pounds, or 500 pounds for higher-paid individuals, you can reclaim the tax deducted
through your tax return. If your annual income
exceeds 150,000 pounds you are not entitled
to a savings allowance. In addition to the savings allowance, there’s the starting savings rate which owner-managed businesses
can take advantage of. In the 2018/19 tax year this allows another 5000
pounds of tax free interest if you earn less than 11,850 pounds. (melodic sting)
(dinging) If you own a property which is used by the
company for its trade, the company can pay you rent. The property can be
anything from a factory to part of your own home, and in every case the
terms of the arrangement should be set out in a
lease or licence agreement. Always seek legal advice
on land-related agreements, and be careful not to give the company exclusive use of any part of your home, as this could restrict your
capital gains tax exemption relating to that property. The rent paid is
tax-deductible for the company, and it does not attract
NICs for you or the company. You need to declare the
rent on your tax return alongside any relevant expenses, such as insurance or mortgage interest. The 1000 pound property income allowance cannot be set against rent
received from your own company. In the long-term, receiving
rent for a commercial property can restrict the availability
of entrepreneurs’ relief on gains made on the eventual
sale of that property. We hope you found that useful. If you’ve any questions please get in touch with us
at Jon Davies Accountants. (melodic sting)

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