The early stages of starting a business can often be the most challenging times you’ll face. You’ve got a ton of important factors to consider: Knowing when to recruit staff, finding and choosing office space, setting goals for turnover, achieving target sales, and so on. There could be dark times ahead for those that don’t prepare, with a number of potential pitfalls such as financial instability if measures aren’t put in place.
But once you’ve got beyond those struggles, running a business can offer massive rewards for those who work hard and are determined. In particular, there comes a time where extracting your business profits can be extremely beneficial.
Once you know your business has surplus cash available, there are several cost-effective ways that you should consider when looking to extract the cash you need. And with tax rules changing on a regular basis, it pays to be in the know about what strategies may have previously worked but are not so effective now, when trying to minimise the tax bill. As such, we’ve put together this post to help you figure out which route is best for you when considering extracting cash from your business.
Salaries and bonuses
It’s often seen to be extremely tax efficient for directors to take a minimum salary. This is where the first £11,500 is considered to be free from income tax. From there, the tax rate increases depending on how much you earn, which is why directors often keep their salary at a low level.
Once you’ve mastered this, one of the ways to extract profit from your business is to pay yourself a bonus, with the benefits dependent on how you pay out the bonus. For example, if you choose a cash bonus, or vouchers that can be exchanged for cash, these are treated as earnings and are subject to PAYE and National Insurance Contributions.
Dividends have changed rapidly in recent times. Originally, there was a 10% dividend credit, which was applied to any profits extracted. Now, dividends can be paid to anyone who owns shares in a company, provided the company is making a sufficient profit to cover the outgoing costs.
As of the April 2017 tax year, the maximum dividend amount a shareholder can receive annually is £5,000 before having to pay tax. If you were receiving dividend income in excess of £5,000, you would see an increase in your tax liability, which we’ve discussed in our blog post on the changes to dividend taxation.
Being paid dividends offers its own host of benefits. For one, they are exempt from any National Insurance Contributions. Another advantage is they are tailored to your individual needs, provided the company can afford to pay them.
It’s not uncommon for business owners to extract cash to help save for retirement, and this can be a good way to benefit from tax relief. Regardless of whether it’s an individual or a company paying into the pension fund, the money isn’t treated as a benefit, which means it’s extremely tax efficient.
This method can also have a knock-on effect to your business’ profit, as any pension contributions from the business effectively reduce the company’s overall profit, which therefore means the amount of corporation tax is also reduced.
Pension schemes clearly offer short and long-term benefits. You are able to extract profit in the short term whilst using that to plan for retirement in the long term, both of which are a great way to make the most of your business’ income.
But what if I just need the cash for a short period?
For instances where you’re just in need of the cash temporarily, it is possible to borrow from the company. When doing this, the loan has to be repaid within nine months after the end of your accounting period.
If you fail to do this, your business would be liable to a 32.5% tax charge. This is usually reimbursed after the loan has been repaid or written off, and you would be liable to a benefit in kind charge based on HMRC’s official interest rate if the loan was interest-free.
Where to go for support
Ultimately, you as the business owner have several options to choose from when considering extracting cash for your company, and in any case, you’re able to reap the financial rewards of your hard work and dedication. But the important step is to find the right process for your company and its profits, so that you don’t create a financial mess.
Our team is available to help provide support and advise you on a strategy that would work best for your business. You can find out more by visiting our website or calling 01223 832477.