Getting the profits out of your business in a tax efficient way is critical if you want to minimise your tax burden.
How to extract profits in a tax efficient way
Having a tax efficient profit extraction strategy is key for any business owner. Typically for most owner directors, extracting income from the company consists of a small salary payment up to the personal allowance and NIC class I threshold followed by a larger dividend payment.
Since 2016 the tax effectiveness of drawing income by way of dividends has decreased. This follows the abolition of tax credits and the introduction of the new dividend allowance.
The result of the changes is that there’s a higher effective rate of tax for certain groups. These are anyone paying themselves dividends in excess of £21,667 if they are a basic rate taxpayer and £25,250 if they are a higher rate taxpayer.
Another tax efficient way to extract profits from the business is via pension contributions. However, many business owners won’t want to tie up their funds until retirement. Therefore having an alternative tax efficient way of extracting funds from the business is vital.
The pensions annual allowance
The annual allowance means that it’s possible to pay up to £40,000 or 100% of net relevant earnings, whichever is lower, in pension contributions. You get full tax relief on these pension contributions.
The annual allowance has been reducing over time. Therefore maximising your pension contributions is something that you may want to take advantage of sooner rather than later.
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