What to do with company profits

danwednesday

Thanks silvercar, much appreciated. That clarifies the situation WRT legalities of transferring money out of the company i.e. it can be done but it needs to be declared and will be liable to personal taxation. It could all be done through PAYE, but that would be inefficient tax-wise, so it's best done as part-PAYE / part dividend.

WRT dividends, am I right in saying the following: The business profits are taxed at 20%, but dividends are taxed at 10% (for the first £34,600) therefore when money is taken from a company as dividends, the dividend is liable for a 10% tax credit (because it's already had 20% taken off, but is only liable for 10%)? So any dividends I take from the net company profit will be subject to a 10% credit?

If I was to take more out through dividends, the rate on the amount over the £34,600 would then go up from 10% to 22.5%?

CannyJock

You would be OK taking up to £5000 out at any one time; that amount is not illegal AFAIAA and no beneficial loan interest is payable. Just make sure you pay it back within 9 months of the end of the company's year to avoid a S419 charge.

Yup, wanted him to to find that out himself if you want to juggle thing along this line and be able to stand up to an argument with your auditor and tax inspector then you need to know the rules back to front

TaxGeek

The higher tax rate for dividends is 32.5%, so with the 10% tax credit works out an effective rate of 25%.

In answer to your questions above

1.The £50k is subject to corporation tax (currently 20% for that level of profit) but you will need to file a CT return within 1 year of the end of the company year end.
2.CT is payable (for that level of profit) 9 months and 1 day after the company year end.
3.Yes
4.If you pay yourself £10k as salary, it comes from pre-tax profits, so would have CT at 20% of £50k, you would pay income tax on any amount over your nil rate band (at 10% for the first £2230, 22% thereafter). If you pay the £4775 as a dividend, the dividend is from post-tax profits, so you'd pay CT at 20% on profits of £54,775.
5.Yes, if you've paid £10k as salary.
6.Yes, or use it to expand?
7.Dividends upto the higher rate tax band taxed at 10%, thereafter 32.5%. But note the 10% tax credit.

Not sure what you do, but note there are specific rules for personal service companies (IR35), which would change the above comments. See www.hmrc.gov.uk.

Judwin

No-one has pointed out that as well as Tax there are National insurance liabilities on any Salary you take. This could ammount to as much as 25% (12.8% Employers NI and 11% Employees NI). These are in effect additional taxes that apply to Salary, and therfore need to be included in any calculations you make.

I believe Employers NI applies to ALL salary - including the £5225 0% Tax band. Employees NI is tiered,and quite complicated to get your head around.

In short - the taxes involved for the vairious means of extracting money from a company into your pocket are :

Salary
Employers NI, Employees NI, Income Tax

Retained Profit in the Company
Corporation Tax

Dividend
Corporation Tax, Higher Rate Dividend Tax

Pension Contributions
None

Cheers,
Judwin

slipp_digby

silvercar wrote: »

The next bit gets trickier:

you could leave the money in the company, but how will you ever get it out?
you could pay into a pension scheme, which means no further tax to pay, but then you won't have access to the money til retirement.
you could bite the bullet, take the money out and pay higher rate tax on it. This works out at something like 32.5% as you still have this assumed tax credit of 10%.

What a good post! You have summed up the dilema that many profitable businesses have in terms of accessing the profit, one which I am luck enough to have.

Once you have the salary and dividends, losing 25% of further dividends can seem painful, and the delayed taxation on these will need that extra bit of finqancial discipline.

Personally, I like to put extra money in a pension on the basis that any profit left in at year end will be taxed at 20% Corporation Tax, but the pension contributions are an allowable cost and hence can be deducted against tax.

£1,000 left in the company becomes £800 at the end of the year due to CT, but its £1,000 in a pension and reduces your taxable profit.

jaype

Interesting thread - we have the same dilemma. At the moment, all the company money is in a single savings account (we have a software product and money from sales is paid in monthly, no real outgings). There's no real need for us to have a business account as wedon't make business transactions. But I'm worried about keeping such a large sum (over 100k) in a single account - surely the Revenue couldn't complain you were embezelling if you split the money to make sure it was wholly covered by the FSA compensation scheme? Any thoughts?

silvercar

This talk of embezelling is misleading, if it is your company you have given yourself permission to spend the money.

The problem is the tax situation in that you need to account for money wihdrawn from the company. This won't apply to sole traders as there is no separate legal entity of "the company" but it does apply to partnerships and limited companies.

jaype

silvercar wrote: »

This talk of embezelling is misleading, if it is your company you have given yourself permission to spend the money.

The problem is the tax situation in that you need to account for money wihdrawn from the company. This won't apply to sole traders as there is no separate legal entity of "the company" but it does apply to partnerships and limited companies.

Ours is a limited company. Given the wobbles in the banking system, I'm a bit shocked that the IR would want us to keep all the profits from the business that we haven't drawn down so far in a single bank account. As long as we're not spending it, can't we just put it in units of 35k in various accounts or bonds in the joint names of the two directors? Couldn't the interest then be reinvested and remain part of the profits until drawn down? Help much appreciated.

johnllew

silvercar wrote: »

The next bit gets trickier:

you could leave the money in the company, but how will you ever get it out?

You could wait until your personal tax situation is more favourable, perhaps when you've retired and are no longer near the higher rate threshold?

Judwin wrote: »

I believe Employers NI applies to ALL salary - including the £5225 0% Tax band.

Wrong; employer's NIC starts at the same level as an employee.

jaype wrote: »

I'm a bit shocked that the IR would want us to keep all the profits from the business that we haven't drawn down so far in a single bank account.

What makes you think that? A limited company can have as many accounts as it likes (or the banks will allow). Putting company monies into accounts in the directors' names can create problems if the money has not been drawn from the company in the form of remuneration or dividends.

silvercar

I'm a bit shocked that the IR would want us to keep all the profits from the business that we haven't drawn down so far in a single bank account.

I don't think this is true. I would have expected business earnings of a limited company to be paid into an account in the name of the business. Unless the names were very similar, I doubt a bank would accept a business cheque being paid into a personal account.