Small Business – Tax Efficient Cash WithdrawalsWritten on June 30, 2016 by Kirk Rice LLP
The Question:
I run my own small business and I have some surplus profits and cash in the company that I would like to draw out as I see it as a risk leaving it in the company bank account. I don’t really need the money at present and so what would be the most tax efficient way of doing this?
Kirk Rice LLP answers:
Profits extracted as a salary are subject to significant NIC charges. For 2016/17, the first £156 per week does not suffer NIC. Above this level your company would pay NIC on all earnings at a rate of 13.8%. In addition to this you will personally suffer NIC at a rate of 12% on earnings between £155 and £827 per week. An additional charge of 2% is levied on the excess of your total salary over £827 per week.
Some owner-managers may be tempted to extract their income entirely in the form of dividends in order to avoid these NIC rates. However, it is often sensible to extract some kind of salary from the company in order to obtain credit towards the state pension. From 6 April 2016 dividends now attract a new dividend tax at rates of 7.5%, 32.5% or 38.1% depending on your personal circumstances. It is true to say that tax has gone up and the gap has narrowed between paying dividends and a salary under PAYE but calculations show that dividends are still the better route.
It is nearly always beneficial to extract surplus funds by means of a dividend rather than as a salary bonus as this avoids the now relatively high cost of NIC. The substitution of dividends for remuneration is not regarded as an abnormal pay practice for NIC purposes. It is possible, however, that the National Insurance Office (NICO) may seek to challenge dividends which have not been declared in accordance with the relevant Companies Act formalities. If the correct legal procedures are not followed, it can be asserted that a payment is not a ‘valid’ dividend and hence must be ‘NIC-able’ earnings.
You have said you have no immediate need for the cash. You may want to consider the company making a payment in to a personal pension plan in your name. Any such payment will be tax deductible for the company and therefore saving corporation tax but also there would be no tax or NIC for you to pay on this benefit. You will of course be locking the money away but depending on your circumstances this could be a very tax efficient strategy.
Any reader interested in discussing this topic further can telephone James on 020 8789 8588 or email james.moody@kirkrice.co.uk
If you would like to receive Taxing Times electronically, simply email info@kirkrice.co.uk stating Taxing Times Newsletter in the subject heading and we will add you to our distribution list.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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