2018/19 Tax Efficient Profit Extraction for Owner Managed Companies

The new tax year means it is time for owner managed companies to consider tax efficient profit extraction.

For many years accountants and tax advisors have suggested that director/shareholders should extract profit by paying themselves a low salary with the remainder of their income being extracted in the form of dividends.

Dividends are not deductible in arriving at the company’s taxable profits.  However, they also do not normally attract National Insurance Contributions (NICs). The starting point of NICs will rise to £162 a week from 6 April 2018. This is now significantly lower than the £11,850 personal income tax allowance. A salary just below £162 a week, £8,424 a year would mean no NIC would be due. This is however sufficient to count as a qualifying year for State Pension purposes (if above £6,032 lower earnings limit).

Employers Allowance Opportunity

Remember that employers other than those where the director is the only employee are entitled to a £3,000 employment allowance.  This can be offset against employer’s NICs (Err’s). If this allowance will not be utilised against Err’s on staff wages, the directors’ should consider increasing their salaries up to £11,850. The additional salary would save Corporation Tax at 19% (on the £3,426 extra salary) which equals £651, whereas the employees NIC would be £411. A taxation saving of £240.

As far as the level of dividends is concerned, the rate of tax changes from 7.5% to 32.5% at £46,350. Ideally if you do not require the funds, dividends should not exceed £34,500 if a salary of £11,850 is paid. The taxation on the dividends will be at 0% on the first £2,000 and 7.5% on the remaining £32,500. Don’t forget that this tax will then be due on 31 January 2020.

Payments on account will also be due.  This is because your taxation liability will be greater than £1,000.  The dates the payments on account (POA) will be due by are:

  • 1st POA will be due by 31 January payment
  • 2nd POA will be due by 31 July.

Contact us to discuss other ways in which you can extract profits from your family company tax efficiently.

Rawlinson Pryde & Partners

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