Following on my previous Blog “Small Business Profits Extraction – Limited Company Dividends” I have been asked to cover the optimum profit withdrawal strategy for smaller business owners operating via a limited company, given the new rules applying from 6 April 2016.

Continuing unchanged from previous years, it’s important to ensure that a salary is drawn at a level which counts towards your hopefully accumulating National Insurance record to safeguard your entitlement to State pension. The good news is that at the right level, which is £8,060 for the 2016/2017 tax year, you can still qualify for entitlement without actually paying any National Insurance. Isn’t that marvellous, especially as the salary is tax deductible to the company and is, more often than not, covered by the universal Personal Allowance of £11,000 before any tax is payable?

Beyond that, unless you can afford to contribute to a pension scheme, it’s dividends, again as usual, but the question is, at what level? Unless your business is very small, the new tax rules (which allow only £5,000 of dividends tax-free annually) dictate that you’re going to have to pay some Income Tax on your dividends. Fortunately, the basic rate of tax on dividends is only 7.5%, unlike the higher rate of tax on dividends which is somewhat nasty at 32.5%. However, subject to the level of your drawings, it’s possible to reduce the overall level of Income Tax to under 5%, as below:

 

Company Profits Before Annual Salaries After Tax      $43,000                           £86,000
Sole Shareholder Shareholder 1 Shareholder 2
Annual Salary   8,060   8,060   8,060
Dividends 34,940 34,940 34,940
Total Income 43,000 43,000 43,000
Personal Allowance (11,000) (11,000) (11,000)
Dividend Income (being top slice of income) 32,000 32,000 32,000
Dividends Taxed @ 0% Nil Nil Nil
Dividends Taxed @ 7.5% 32,000 32,000 32,000
Dividends Taxed @ 32.5% Nil Nil Nil
Tax Payable 2,025 2,025 2,025
Overall Rate of Tax 4.7% 4.7% 4.7%
Net “Take Home” £40,975 £81,950

 

So, it all depends if your glass is half-full or half-empty. If you’re a glass half-empty type of person, yes you’re paying tax you didn’t have to pay in previous tax years. If there’s two of you and you’re still half-full, you can distribute £86,000 worth of profits for tax of just £4,050!

Disclaimer: While every effort has been made to provide, valuable, accurate information in these publications, their content is not intended to replace the advice that a professional would give, taking your particular circumstances into account. This firm, contractors and employees do not accept any responsibility or any form of liability for reliance upon or use of the contents of these articles or blogs.