As a small business owner, navigating the early stages of your company life cycle can be incredibly challenging. From recruiting the right employees to finding suitable office space, there are many pitfalls to avoid along the way. One of the deadliest snares is financial instability, which can make it difficult to stay afloat. This post will provide a selection of tactics that business owners can use to extract profit from their business while keeping one eye on their taxes at all times.
One way to extract profit from your company while still benefiting from tax relief is by contributing to a pension scheme. Whether it’s an individual or the company itself that pays into the pension fund, this money is not considered a benefit and is very tax-efficient. The limit for how much can be paid into a pension each tax year is £40,000 for individuals, but this is reduced for anyone with an annual income exceeding £150,000. Personal pension contributions are restricted to no more than 100% of an individual’s relevant earnings, so it’s important to carefully consider the other strategies in this post before making any decisions.
Any pension contributions made by the company, rather than the individual, reduce the overall profit of the business, which also reduces the amount of corporation tax payable. There is no limit on how much a company can pay into a pension scheme, making it an attractive option for many business owners. When withdrawing from your pension pot, the first 25% is tax-free, with any subsequent withdrawals taxed at your tax rate at the time, which is generally lower than at the time of paying into the scheme. Contributing to a pension is a great way to extract profit from your business in both the short-term and the long-term.
Dividends can be paid to anyone who owns shares in a company, provided the company is making sufficient profit to cover the costs. Starting in the new tax year this April, a shareholder can receive up to £2,000 in any tax year (between 6th April and 5th April) before paying tax. After this, any further payments will be taxed based on the tax bands below.
Remember, dividends are added on top of other income, so a dividend that takes someone into the next tax band may be partially taxed at a higher dividend tax rate. The tax advantages of being paid dividends are twofold: they’re exempt from National Insurance Contributions and are discretionary, meaning they can be tailored to individual needs provided the company can afford to pay them. All dividend payments should be accurately recorded, with a tax notification issued.
Salary and Bonuses
To achieve maximum tax efficiency, it’s wise for directors to take a minimum salary. For directors, the first £11,850 is income tax-free. From there, 20% is payable on any salary up to £46,350, 40% on any salary up to £150,000, and 45% on any salary exceeding this.
One of the most obvious and appealing ways to extract profit from your company is to pay yourself a bonus. The benefits will largely depend on whether you’re receiving a cash or non-cash bonus. If your bonus is paid in cash or anything exchangeable for cash (like vouchers), it will be counted as earnings and will be subject to both PAYE and employee and employer NICs. For non-cash bonuses, the amount of tax payable will depend on the item in question.
Private investments are an excellent opportunity to commit your money to another business, helping early-stage companies to reach their next stage of growth. With opportunities to invest your money in a private company that interests you personally and professionally, you can invest your profits into the right business for you.
Investing in a private company means you can be involved from the early stages of a company’s life and make a tangible difference to its development. With the potential for EIS or SEIS eligibility, you may also be able to reap the rewards of great tax. With your tax-efficient investments in good hands, you can decide on the amount of involvement you’d like with your investment and how often you’d like to receive updates. This means you’re completely in the loop when it comes to where your investment’s being spent.
Director’s loans can be a temporary method of extracting money from your company. They’re better known for helping directors pay unexpected bills or costs. They are admin-heavy and can cause concern from shareholders, and there is a risk of hefty tax penalties if paid late (after nine months and one day).
However, they can also work the other way: you can loan the company money in return for interest. Any interest paid is treated as income and must be stated on your self-assessment tax return. Before using a director’s loan, it’s best to speak to an accountant. You can find more information on director’s loans on the gov.uk site.
Tracking Your Profits
Finally, it’s important to know your profits and expenses to understand your financial position accurately. There are many tools available to help track your profits, and using them is essential to running your business effectively. One such tool is the Appwiki Expense Management Software, which helps companies track their expenses and profits easily.
As a small business owner, profit extraction is crucial to keeping your business afloat. The tactics outlined in this post can help you extract profit from your business while keeping an eye on your taxes. Consider which methods will work best for your business and consult an accountant before making any decisions. By following these tips, you’ll be well on your way to financial stability and success.