Extracting Profits Tax Efficiently from your Company

Extracting Profits

With the introduction of the dividend tax regime from 6th April 2016 and the reduction of the dividend nil rate band from £5,000 to £2,000 from 6th April 2018, we need to look at additional ways of extracting profits tax efficiently from your company.

It has always been the case that combining a low salary with dividends is the most efficient way of extracting cash from your company to avoid the national insurance costs, which apply if all cash is taken by way of salary.

But are there any other methods we could employ to improve the position?

Interest on Director’s Loan Account

Where a director takes a low salary – say £10,000 and the remainder of his profits by way of dividend, the starting rate for savings income is available  – the starting rate band is now £5,000 with a tax rate of 0%.

It is worth considering paying interest on loans made by directors to their companies. The interest paid by the company will need to have basic rate tax deducted from it and the tax paid over to HMRC under the interest payments scheme (form CT61). The interest paid should be deductible by the company for corporation tax purposes.

Interest rates of circa 10% could be paid as this would be comparable with unsecured lending by an unconnected 3rd party (a bank for example) to the company.

The following example shows the numbers: –

  • Assuming a salary is taken at the Personal Allowance level of £11,850
  • Interest of £5,000 is paid on a £50,000 directors loan account (10%)
No interest Interest
Profit 40,000 40,000
Salary (PA level) (11,850) (11,850)
Interest 0 (5,000)
Taxable profit 28,150 23,150
Corporation tax 5,348 4,398
Profit after tax 22,802 18,752
Dividends 22,802 18.752
Total income 34,652 35,602
Tax on dividends 1,560 1,256
Total tax on profits 6,908 5,654
Tax saving   1,254

At the £60,000 profit level, the numbers would be:-

No interest Interest
Profit 60,000 60,000
Salary (PA level) (11,850) (11,850)
Interest 0 (5,000)
Taxable profit 48,150 43,150
Corporation tax 9,148 8,198
Profit after tax 39,002 34,952
Dividends 39,002 34,952
Total income 50,852 51,802
Tax on dividends 3,901 3,834
Total tax on profits 13,049 12,032
Tax saving   1,017

If you have lent money to your company talk to us about the possibility of improving your post tax position by having the company pay interest on the loan.

For further information and advice on extracting profits tax efficiently from your company contact paul.dell@raffingers.co.uk.