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TLC loves… taking tax-efficient profits out of your business

If you run a limited company you are probably familiar with the two basic ways to take money out of a profitable business – salary and dividends.

Since 2016 the government has made a range of changes which make it not quite as attractive as it used to be to take money out of a limited company using dividends. Many of the changes signal an intent to level the playing field so personal tax and tax on limited companies is much more similar.

We always want to play within HMRC’s rules, but also to do the best for our clients, so here’s our quick guide to being tax-efficient with your profits.

Set your salary at the right level – we recommend paying enough to take each director up to the National Insurance threshold, currently £8,060 or around £680 a month, without going over the personal allowance threshold and incurring personal tax

Use dividends smartly – a new personal tax on dividend income means some directors will have a tax bill in January 2018, but as you don’t pay NI on dividends they are still usually more tax-efficient than taking more salary. We’ll let you know if dividend tax affects you when doing your self-assessment paperwork as the rate changes depending on your personal tax rate. After introducing this change the government gave a bit of ground with a £5,000 dividend allowance before the tax is applied. If you’re about to go into the higher-rate tax bracket, think about deferring a dividend into the next accounting year

Take your personal situation into account – as individuals each get a dividend allowance, any partners or grown-up children can be made shareholders and be paid dividends. If family members don’t have other income and are genuinely involved in the business you can also pay them a salary to make the most of their tax-free allowance

Play the pensions game – saving for retirement is always a good idea so while it’s not money in your pocket immediately, it is a good thing and tax efficient. Pension contributions made by the company are treated as an expense and therefore reduce your company’s Corporation Tax liability as well as becoming income in a pension pot that hasn’t been taxed. We will discuss this with you at your year-end accounts meeting

Make property work for you – if you own the commercial premises your company operates from but don’t charge it rent, you’re missing out on an opportunity. This is something else we cover in your year-end meeting. Also, make sure you are claiming for use of home if you have a home office. We can send you a spreadsheet to fill in the relevant information ready for adding to your year-end accounts

As always, feel free to give us a call about your situation and we can advise.

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