Tax efficient profit extraction – a few timely reminders

All you need to know about Tax Efficient Profit Extraction

At TAG Accountants Group our aim is to maximise our clients’ wealth whilst legally minimising their tax bills. 

As we have entered a new tax year with changes to personal allowances and tax bands, director shareholders should review their salary and dividend mix, so with that in mind, here are some timely reminders about minimising tax on extracting company profits for the 2019/20 tax year.

Firstly, a word or two about salaries

The £3,000 employment allowance remains available to set against the employer’s national insurance contribution (NIC) liability which means that where the company has not fully used this allowance against employee salaries, it may be set against the employer’s NIC on directors’ salaries, enabling them to take salaries above the Secondary Threshold for NIC (£8,632 p.a.) to utilise the unused employment allowance and still gain a net tax saving for themselves and the company.

Where the only employees are husband and wife there would generally be no PAYE or employer’s NIC on a salary up to the £12,500 personal allowance. That said, employee’s NIC at 12% would still be levied on the excess over £8,632 (£166 per week) amounting to £464 on a £12,500 salary, leaving a net amount of £12,036. This would though produce a reduction in corporation tax for the company of £735 giving a net tax saving of £270 per director.

Where employment allowance is being used elsewhere, the advice would be to take salary at the Secondary Threshold level of £8,632 as the employer/employee NIC liability on any excess would exceed any corporation tax saving for the company.

Now, let’s look at dividends

After following the above advice on salaries, traditional advice would then be to extract any additional profits from the company in the form of dividends. Where those dividends are within the basic rate band of £37,500, after the £2,000 dividend allowance has been applied, a rate of 7.5% is applied. 

So, where husband and wife are 50:50 shareholders they would each pay £2,663 tax on dividends of £37,500 assuming they have no income other than a £12,500 salary, leaving £34,837 net of tax. This enables each director shareholder to net £47,337 on gross earnings of £50,000 during 2019/20.

In order to follow this strategy, the company must make sufficient profits (or have enough undistributed profits from previous years) to enable £75,000 of dividends to be declared if there are 2 director shareholders.

Assuming there are no brought forward reserves, in order to pay net dividends of £75,000, a company will also need to make a provision for corporation tax of 19% against that payment; i.e. £92,593 of profits, being corporation tax of £17,593 and £75,000 of dividends.

In summary, for a 50:50 husband and wife company where both earn gross income (salaries/dividends) of £50,000, using this strategy, the company would pay £17,593 of corporation tax on profits funding the dividend element, and the husband and wife would then each pay a total of £464 NIC and £2,663 income tax too.

Need help with any of that?

Here at TAG Accountants, Wolverhampton, we review our clients’ tax strategies annually to ensure their tax position is maximised. So, if you are not getting this type of advice from your accountant, please give us a call on 01902 783172 or just click HERE to book a FREE no obligation consultation to see what you are missing!

We very much look forward to hearing from you.