There are always challenges for every business owner at the point where their business is making constant profit and receiving greater cash inflows. This challenge leads to find the most efficient way to extract money from the business to how these extractions will be shown in the company’s records and even at which cost this will be done.
Majority of owner-manager businesses hardly separate business activities from their personal expenditures well knowing that they are now sole-trading as proprietor which makes it harder and complicated to determine business performance. Over recent years, HMRC has fined many businesses due to inappropriate arrangement of profit extraction and deliberate omission of cash withdrawals which has led to huge penalties that cannot be contested, something directors would not want from a cash flow perspective.
The constant change in tax laws and regulations and complexity in the UK tax system are reasons why owner-manager businesses need to be updated and receive constant advice on how to extract profits from their business in a legal and efficient way. Recently, HMRC has reduced the Dividend Allowance from £5,000 to £2,000 for the 2018/19 tax year, further limiting the amount that can be extracted at a minimum cost. Similarly, the personal allowance and the basic rate band have slightly increased to £11,850 and £34,500 respectively, which means that owner-managers who earn more than the sum of these two will be taxed at 40%, something one would like to avoid.
Furthermore, once profits tend toward a particular level, the costs of extraction which are particular Taxes (i.e. personal income tax on director(s) and corporation tax on the business itself) will continue to soar. What you do not want to do is to give HMRC a larger percentage of shares on your hard earn money. However, optimal balance of salary and dividends are still relevant to optimal profit extraction. There are other strategies and ways to set-up the business that could save you a great deal, ranging from charging interests on loans to provision of tax-exempt benefits to business owners and making private investments.
Many owner-managers do not realise making private investments in another business, such as early start-up companies, could result in a great tax advantage. One could get up to half of what is invested in a Seed Enterprise Investment Scheme (SEIS) eligible company, thereby reducing the cost of profit extraction from their businesses.Need advice? Contact Bergen Associates on for Tax planning and advice. Our Tax Team can advise on an efficient strategy to use excess profits and to extract profit at a very low cost. Bergen also advise on setting up business for tax compliance and making private investments.