There are a number of ways that director shareholders of private companies can withdraw funds from their businesses. We have listed below a number of options, the list is not exhaustive, but the points do provide insight into the opportunities that current tax law allows incorporated businesses.
Director shareholders can provide themselves with up to £300 a year in non-cash benefits as long as each “gift” does not exceed £50 and is not related to their employment. Potentially, unlimited “trivial benefits” can be provided to non-family employees, i.e. the £300 annual cap does not apply.
Directors who have lent their company significant funds, can receive interest at a commercial rate on the funds deposited. There are a number of reliefs that can be claimed to reduce tax on interest received, and even if these do not apply, the interest payment will not attract an NIC charge.
Directors aged below the State retirement age will no doubt want to ensure that they are still making NIC contributions that will qualify them for the State Retirement Pension. Many directors ensure that they pay themselves the minimum salary to achieve this planning objective.
Dividends remain the most tax efficient method of taking retained profits from your business. The annual tax-free limit is still £5,000. Dividends drawn in excess of this will be taxed at 7.5%, 32.5% or 38.1%, all dependent on where the dividend income slots into the basic, higher or additional rate income tax bands. However, dividends continue to be exempt from a NIC charge. A final point to observe: dividends can only be taken from the company’s retained profits.
Recent legislation has mitigated against the practice of taking benefits in place of remuneration – so-called salary sacrifice arrangements. In future years these benefits may be taxed as if they were salary. There may be short-term benefits in exploring these options, and these should be considered. Longer-term, other planning strategies may be required.
If director shareholders have children, 18 years or older, it may be possible to issue them with company shares and pay them a small dividend each year. Currently, there is a potential here to provide over 18s with a £5,000 annual, tax-free income.
As you can see, extracting funds from a company can be achieved in a number of different ways, and these options should be a priority when considering your tax planning strategy. Please call if you would like more information on any of the topics raised in this post.