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Tax-Efficient Ways to Extract Profits from a Limited Company
As a director and shareholder of a limited company, it’s important to extract profits in a tax-efficient manner. Here are some strategies to consider:
- Salary:
Paying yourself a salary up to the National Insurance (NI) threshold (£12,570 for 2024/25) is often tax-efficient. This approach:
– Is tax-deductible for the company
– Counts towards state pension contributions
– Doesn’t incur personal or employer’s NI
- Dividends:
Dividends are often more tax-efficient than higher salaries because they’re not subject to NI. Remember:
– Dividends can only be paid from profits
– The first £500 of dividends are tax-free (2024/25 tax year)
– Dividend tax rates are lower than income tax rates
- Pension Contributions:
Company contributions to your pension are:
– Tax-deductible for the company
– Not subject to personal income tax or NI
– Subject to annual and lifetime allowances
- Benefits in Kind:
Some benefits, like mobile phones or workplace nurseries, can be provided tax-free.
- Director’s Loan:
You can borrow up to £10,000 from your company interest-free without it being a taxable benefit.
- Rent:
If you own a property personally and your company uses it, the company can pay you rent. This is:
– Tax-deductible for the company
– Taxable as income for you, but can be offset against property expenses
- Profit Extraction Planning:
– Spread dividend payments across tax years to maximize use of lower tax bands and allowances
– Consider timing of bonuses and dividends in relation to other income
- Family Member Employment:
Employing family members can be tax-efficient if they perform genuine work at a reasonable salary.
- Electric Vehicles:
Providing an electric company car can be tax-efficient due to low Benefit in Kind rates.
- Research and Development (R&D) Tax Credits:
If applicable, these can significantly reduce corporation tax or provide a cash refund.
Remember, the most tax-efficient strategy depends on your specific circumstances and can change with tax legislation. Always consult with a qualified accountant to ensure your profit extraction strategy is optimized and compliant.
