Extraction of companies’ profits will frequently result in a tax charge and often National Insurance contributions (‘NICs’) being levied. As such, careful planning is crucial in order to keep tax burdens to a minimum.

The simplest extraction methods available to owner-managers are either paying additional salary (i.e. a ‘bonus’) or dividends.  Each option has its own pros and cons.

Paying a bonus is likely to generate a charge to National Insurance (both employee and employer). However, the bonus and employer National Insurance are tax deductible for the company.  A dividend is paid out of retained earnings, and therefore no such deduction for corporation tax purposes is allowable.  But there is no charge to National Insurance on the dividend, and dividends suffer income tax at a lower rate than employment income.

Director-shareholders may be able to benefit from other methods of extracting funds from their company which might be available, such as charging rent on property, interest on loans or, indeed, by taking a loan from the company.

Getting the company to make pension contributions on your behalf is often worth exploring. There are many other tax free benefits which are available to directors and other employees, such as a mobile phone. Whilst these are not a direct extraction of funds, they can lead to a reduction in personal expenditure and so are worth considering. Generally, company cars have become less appealing in recent years as the tax liability on cars is levied based on CO2 emissions. However, these should not be dismissed as, if a low emission car is purchased by the company, the director might have a low taxable benefit and as such a low tax charge on the receipt of this benefit. The company will receive capital allowances on the cost of the car too, a deduction for corporation tax purposes, the percentage of which depends again on the CO2 emissions of the car.

As well as considering the tax impact of the chosen profit extraction strategy, it is important not to lose sight of the commercial, legal or long term implications.

The comments made here constitute guidance only.  To discuss your personal circumstances and obtain a tailor made solution please contact us.