Sponsored content - How can you make the most of your profits? Tips for Suffolk businesses
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Ever-changing tax rules make it hard for business owners to work out the most tax-efficient way of extracting profits from their companies, writes Keith Senior of Jacobs Allen Chartered Accountants and Chartered Tax Advisors.
We can offer detailed advice on the best strategy to help grow your individual business, safeguard against future pressures and ensure you reap the benefits of the hard work and commitment you have put into establishing your company.
This will often mean using a combination of methods to extract profits including paying yourself a regular wage and taking dividend payments as well as looking at longer term objectives. With the right income combination, it is possible to get £22,000 of income without having any tax liability.
Here we offer a guide to the basics.
It is important to pay yourself a wage or salary, as some other forms of payment are restricted if the company is not turning a profit at that time.
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How much you pay yourself will depend on a number of factors but remember the first £11,000 you earn is tax free. You will pay basic rate income tax of 20% on earnings between £11,000 and £43,000, and 40% on income over £43,000.
Those earning in excess of £150,000 per annum will be liable to pay 45% tax.
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Remember, as an employee you also have to pay national insurance contributions (NICs) of 12% on wages above £155 per week or £8,060 per annum if you are a director, up to £827 per week or £43,000 per annum, and 2% on any excess over those maxima.
As an employer you will be responsible for NICs of 13.8% on any salaries you pay over £156 a week. There is, however, the employment allowance that reduces employer NICs by up to £3,000 a year where there is more than one director employee.
After a particularly successful period, you may be tempted to take a bonus payment from the company, but the tax liability rules differ according to how and when that is paid so check with your advisor on the best way to do this.
Payment of rent by the company on property owned by you personally and used by the company, or interest on any amount you lend to the company are alternative ways of extracting profits tax efficiently, but there are other implications of both these methods and you should consult your advisor about these options.
It has been common practice to draw a small wage of under £8,060pa to avoid NICs and income tax, while taking a regular dividend payment.
From April 6, 2016 a £5,000 annual dividend tax allowance was introduced. Any dividend income over and above that figure is subject to tax, with 7.5% at basic rate, and 32.5% at higher rate.
This can, however, be a higher-risk strategy as dividends can only be paid if there are profits out of which to pay them and you might restrict your personal income in a loss making period.
In the founding years, some owners may find it difficult to turn a profit, while others may see their balances rising steadily from the off.
It may be advantageous to retain some of the profit earned each year within the company to act as a buffer should profits be hit in future years. Even successful entrepreneurs can record a loss if they have invested heavily in a specific year in order to grow their business.
How that money is held and used within the business can have a longer term effect on future strategies, so it is important to plan this when profits are being made and develop a strategy that suits your goals.
This money, however it is retained, could then be used to fund dividend payments or bonuses in years when profits are below par, or reinvested to grow the business, which can be part of your retirement fund.
A longer term strategy is extracting money as a capital gain if and when you decide to wind the company up – and this method can be extremely tax efficient if the funds qualify for entrepreneurs’ relief.
As well as looking to safeguard the future of your business, remember your personal finances. Making pension contributions personally or direct from the company will reduce your tax bill and ensure you have a nest egg for retirement. The contributions that you pay will benefit from government tax relief and they are not taxed while they are invested in your pension pot. Remember you get tax relief but not NIC relief on personal pension contributions, so if the company can make the contributions direct, that can be advantageous. However, there is a usual £40,000 limit on the total amount of money from both you and the company that can be put into a pension each year. This limit can reduce if you earn over £150,000 a year or you can benefit from using unused relief from earlier years in certain circumstances. Pension planning is a fairly complex subject and must be addressed according to your own specific circumstances, as there are several very useful ways of maximising the benefit of funding your retirement in this way.
Finally, it may be worth exploring benefits in kind – these could include childcare arrangements, medical insurance, bikes, sports facilities, work travel and subsidised meals – some of which are tax-free or efficient benefits.
These could benefit you as a director and also your employees.
• For further advice on extracting profits from your business, see here or call the Bury St Edmunds office on 01284 704260 or the Haverhill branch on 01440 707184.