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PROFIT EXTRACTION FROM YOUR BUSINESS
SIMON PHILLIPS Independent Financial Adviser
If you run your own company you can decide how much, when and how to pay yourself.
The wealth you work so hard to build up however belongs to the business, not you. If you take money out in the wrong way, you could be liable for tax penalties.
At Continuum we look at ways to extract profit from your business, without giving it straight to the taxman. There are three main routes for a business owner to extract profits from their own limited company: salary, dividends, and pension contributions.
Making the least of your salary
Most business owners will reduce their tax bill by paying themselves a small salary and taking additional income as dividends.
Your salary will attract income tax (for tax year 2020/2021):
• Pay yourself less than the income tax threshold of £12,500 and there is no income tax to pay
• From £12,501 to £50,000 you will pay 20% • From £50,001 to £150,000 you pay tax at 40%,
• And if you are in the position to be able to pay yourself a salary of over £150,000 per year, the taxman will share your good fortune at 45%.
Not only does a small salary mean paying less tax, it means smaller National Insurance Contributions (NIC). You pay 12% employees NIC while the business would have to pay 13.8% employers NIC on your salary.
The simple way to pay less tax and still earn £100,000 per year is to split it into a small salary, £12500, and a £87,500 dividend.
Making the most of your Dividends
Dividends can reduce or eliminate your income tax liability, but are not tax free. You can only pay dividends
on profits generated, which incur 19% corporation. For the current tax year (2020/21), you can take up to £2,000 worth of dividends tax-free.
How much tax you pay on dividends above the dividend allowance depends on your income tax band:
• Basic Rate – 7.5% • Higher Rate – 32.5% • Additional Rate – 38.1%
Remember, your dividend tax allowance could be used up by other payments you have received i.e. investments that pay dividends so advice is important.
Making more of your pension
If you earn up to £200,000 per year your company can put up to £40,000 per year in a pension plan, completely tax-free, up to a lifetime value of £1,073,100.
That’s a significant amount of money in a tax-efficient fund, which has the added protection of being outside your business – and possibly out of reach of creditors if things go wrong.
But if you run a business, the possibilities don’t stop there. Small Self-Administered Scheme (SSAS) pensions can let you decide how to invest your pension contributions, and that could not only be rewarding, it can let you invest in your own business. You could potentially use your fund to buy your business premises, capital equipment or a business initiative that can bring an identifiable return.
Getting the help you need
Naturally, the rules about tax and your business are complicated. Having an expert at your side will be vital, and at Continuum, we can provide the expertise you need.
To talk to us about profit extraction, and how it can be integrated into your broader financial plans, contact us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or tax strategy, you should seek independent financial advice before embarking on any course of action. The value of investments can fall as well as rise and you may get back less than you invested. Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances. The Financial Conduct Authority does not regulate taxation advice.
MORTGAGES LIFE INSURANCE SAVINGS INVESTMENTS FOR A FREE INITIAL CONSULTATION CONTACT
SIMON PHILLIPS Independent Financial Adviser: T: 07484 095 044 E:
simon@mycontinuum.co.uk Based in Kingswear, providing coverage across the South West
www.mycontinuum.co.uk
Continuum (Financial Services) LLP, Falcon House, Eagle Road, Langage, Plymouth, PL7 5JY T: +44 (0)345 643 0770 E:
info@mycontinuum.co.uk www.mycontinuum.co.uk Continuum is a trading name of Continuum (Financial Services) LLP Falcon House, Eagle Road, Langage, Plymouth, PL7 5JY which is authorised and regulated by the Financial Conduct Authority
PENSIONS ESTATE PLANNING
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