Tax planning plays a key role when extracting profits from a company, therefore, careful thought should be given to a strategy which is tax efficient.
This is the simplest and obvious way of extracting money from the company. By taking a salary between the lower earnings limit (£6,136) and the primary threshold limit (£8,632) the director can benefit from a qualifying year for state pension and contributory benefits purposes. This can be further increased depending on the availability of the Employment Allowance – note that this allowance is not available to companies where the sole employee is also a director.
Salaries are an allowable expense for corporation tax purposes and will therefore reduce the company’s profit and tax liability. Furthermore, all taxpayers get a personal allowance of £12,500 meaning that no tax will be paid until incomes exceeds this amount.
Dividends can only be paid if the company has sufficient retained profits. By contrast a salary can be paid even if the company makes a loss. All taxpayers get a dividend allowance of £2,000. Dividends below £2,000 will be taxed at a zero rate of tax. No national insurance contributions are payable on dividend payments.
Alphabet shares can also be used to extract profits from the company, but it is a complex area and specialist tax advice should be taken when using these.
Director’s Loan Accounts
One can borrow up to £10,000 for up to 21 months tax-free by borrowing the money on the first day of the accounting period and repaying the loan nine months after the year end.
Exceeding £10,000 loan amount will trigger a benefit in kind charge if the loan is tax free. Should you fail to pay the loan before the normal due date for CT purposes a section 455 tax charge (temporary tax which is repaid after the loan has been repaid) will arise. There are anti-avoidance rules to prevent the loan from being cleared and the funds re-borrowed in a bid to avoid the charge.
There is no taxable benefit regardless of the private use, if the company provides a director or an employee with the use of a mobile phone. Mobile phone includes a smart phone but not a tablet PC like an iPad.
Meals provided on the employer’s premises are tax-free provided all employees are entitled to it. This means that a lunch time sandwich can be paid for the company. Make sure you file the receipts to support your claim in case of an inquiry.
Reimbursing the employee’s parking costs is also not taxable (as a benefit).
This will only be tax efficient if the car has low CO2 emissions, but these will trigger a car benefit charge and also a fuel benefit charge, if the company pays for the fuel as well.
Another tax efficient way to extract funds from the company is to pay for business mileage when using their own car, vans, motorbike or bicycle in course of their business. These amounts can be paid free of tax and without any need to report the payment to HMRC. For cars and vans it is 45 pence for the first 10,000 business miles in a tax year, then 25 pence for each subsequent mile. Therefore, it is important that you keep a log of all your business mileage.
A company can provide tax free annual medical check-up to an employee/director provided all employees benefit from this.
It should be noted that provision of medical insurance and medical treatment are taxable benefits in the UK.
Introduced from 06 April 2016, it provides an opportunity to extract small amounts of profits from the company without paying tax and national insurance. The cap is £300 per annum per employee but cannot cost more than £50 at a time. It can be used to treat employees with, say a ticket to a cricket match or a meal out. These are some of the ways you could extract monies from your company in a tax efficient manner. To learn more or discuss how we can help you please contact us.