Expansion / Maximising Profits

Extracting profits from your business

Find the most tax-efficient option for you and your company

Extracting profits from your business

Find the most tax-efficient option for you and your company

Extracting profits from your business

Find the most tax-efficient option for you and your company

Extracting 02 1200X700

With the new tax year now up and running, there will be many business owners thinking about how to extract the profits they make this year in the most tax-efficient way.

Everyone’s financial journey and situation is different and there are several considerations, depending on your own personal needs. There is often a balance to be struck between taking money out and investing for the future. So, if you run a business, what are the main ways that you can extract profits? There are three options available to you:

  • take more salary
  • pay extra pension contributions
  • pay a dividend

There were no increases to Income Tax or National Insurance in the Budget in March, but there were some tweaks to other tax policies that business owners should bear in mind when deciding how to extract profits. These are outlined below.

Here are some of the main considerations you should make before deciding on the best option for extracting profits from your business.

National Insurance (NI) contributions

National Insurance contributions are paid both by the employer and employee, which means business owners who pay themselves as employees are charged twice. Employer national insurance stands at 13.8%, while employee national insurance is charged at 12% for earnings between £184.01 and £967 a week and 2% for earnings above £967 a week.

In practice, £20,000 would suffer £2,425 employer NI. The residual would then suffer a further £2,109, if below the upper earnings limit. If above the upper earnings limit, however, the employee NI would be only £351.50.

Corporation Tax

The main rate of Corporation Tax will remain at 19% for the tax year beginning 6 April 2021 and will rise to 25% from April 2023 for businesses with profits of £250,000 and over. The rate for businesses with profits of £50,000 or less will remain at 19% and there will be a marginal taper for profits between £50,000 and £250,000.

Salary and pension contributions would generally be classed as ‘allowable business expenses’, and therefore would reduce the amount of Corporation Tax payable. On the other hand, dividends are not a business expense and will be subject to Corporation Tax. With Corporation Tax at 19%, if there was £20,000 to distribute, this would reduce the payment made by £3,800.

With Corporation Tax set to rise, it could become more efficient to extract profits into a pension. However, you should always remember that these funds are not accessible until you are 55.

Income Tax

Subject to certain limits, pension contributions are not taxed immediately, but future pension income will eventually be subject to Income Tax at your marginal rate – although in most cases 25% will be paid tax-free. It should also be remembered that tax-efficient tax growth generated within the pension could increase the eventual tax paid, or subject it to a lifetime allowance charge.

Your salary, meanwhile, will be subject to your marginal rates of Income Tax. If you are earning at or near £100,000, you will need to be careful, as the loss of the personal allowance could make this option less attractive. This means that any earnings above £100,000 will start to erode the personal tax allowance of £12,570 a year, in effect increasing the amount of tax you pay.

The same is true of dividends, although you may also have access to the dividend allowance of £2,000, depending on other dividends received. The higher-rate tax on dividends is less than on salary at only 32.5%.

Through the personal savings allowance, basic-rate taxpayers can continue to earn £1,000 of interest on savings before paying tax in 2021/22. Those paying tax at the higher rate see their allowance remain at £500.

Inheritance Tax (IHT)

Although not an immediate tax, payments made to pensions should remain outside your estate for Inheritance Tax purposes. Inheritance tax is a tax on the estate – which includes money, property and possessions – of someone who has died. The standard rate is 40% on any value of your estate which is above the nil-rate band. Any further drawing, such as dividend or salary, that is not spent will just increase the estate and therefore the amount of IHT payable.

Annual allowance issues

For many, the tapered annual allowance won’t be an issue, but for those who it affects – including those who have already used their standard annual allowance (the total you can pay into a pension pot each year while receiving tax relief) – this will need to be considered.

The benefit of tax relief will be lost on anything over the value of your available annual allowance and carry forward (where some contributions above the annual allowance receive tax relief) which may mean that a pension contribution is less favourable. The annual allowance can’t be ignored, but it shouldn’t be the sole driver for dismissing pension contributions as an option.

Take action now

There are many moving parts to extracting funds from a company. In reality, some – if not all – of the three routes of salary, pension and dividends will be used each year to maximise the use of allowances and provide a useable income and protection for the future.

Speak to a St. James's Place Partner to determine which, if any, of these options is best for you.

Budget 2021: Tax exemptions and allowances checklist

Income Tax: The personal allowance has increased to £12,570. Similarly, the higher-rate threshold – the point at which you will start to pay 40% Income Tax – has risen slightly to £37,701 of taxable income or £50,271 of gross income in 2021/22.

Dividends: The dividend allowance is unchanged at £2,000.

Personal pensions: There were no changes to personal pension tax relief, meaning most people can still get relief on pension contributions worth up to £40,000 a year. The lifetime allowance remains the same at £1,073,100 for 2021/22.

Capital Gains Tax: The Capital Gains Tax annual exempt amount for individuals will remain at £12,300 until 2026. 

Inheritance Tax: The Inheritance Tax nil-rate band for 2021/22 remains at £325,000 and will be frozen until 2026. The residence nil-rate band stays at £175,000.

 

With the new tax year now up and running, there will be many business owners thinking about how to extract the profits they make this year in the most tax-efficient way.

Everyone’s financial journey and situation is different and there are several considerations, depending on your own personal needs. There is often a balance to be struck between taking money out and investing for the future. So, if you run a business, what are the main ways that you can extract profits? There are three options available to you:

  • take more salary
  • pay extra pension contributions
  • pay a dividend

There were no increases to Income Tax or National Insurance in the Budget in March, but there were some tweaks to other tax policies that business owners should bear in mind when deciding how to extract profits. These are outlined below.

Here are some of the main considerations you should make before deciding on the best option for extracting profits from your business.

National Insurance (NI) contributions

National Insurance contributions are paid both by the employer and employee, which means business owners who pay themselves as employees are charged twice. Employer national insurance stands at 13.8%, while employee national insurance is charged at 12% for earnings between £184.01 and £967 a week and 2% for earnings above £967 a week.

In practice, £20,000 would suffer £2,425 employer NI. The residual would then suffer a further £2,109, if below the upper earnings limit. If above the upper earnings limit, however, the employee NI would be only £351.50.

Corporation Tax

The main rate of Corporation Tax will remain at 19% for the tax year beginning 6 April 2021 and will rise to 25% from April 2023 for businesses with profits of £250,000 and over. The rate for businesses with profits of £50,000 or less will remain at 19% and there will be a marginal taper for profits between £50,000 and £250,000.

Salary and pension contributions would generally be classed as ‘allowable business expenses’, and therefore would reduce the amount of Corporation Tax payable. On the other hand, dividends are not a business expense and will be subject to Corporation Tax. With Corporation Tax at 19%, if there was £20,000 to distribute, this would reduce the payment made by £3,800.

With Corporation Tax set to rise, it could become more efficient to extract profits into a pension. However, you should always remember that these funds are not accessible until you are 55.

Income Tax

Subject to certain limits, pension contributions are not taxed immediately, but future pension income will eventually be subject to Income Tax at your marginal rate – although in most cases 25% will be paid tax-free. It should also be remembered that tax-efficient tax growth generated within the pension could increase the eventual tax paid, or subject it to a lifetime allowance charge.

Your salary, meanwhile, will be subject to your marginal rates of Income Tax. If you are earning at or near £100,000, you will need to be careful, as the loss of the personal allowance could make this option less attractive. This means that any earnings above £100,000 will start to erode the personal tax allowance of £12,570 a year, in effect increasing the amount of tax you pay.

The same is true of dividends, although you may also have access to the dividend allowance of £2,000, depending on other dividends received. The higher-rate tax on dividends is less than on salary at only 32.5%.

Through the personal savings allowance, basic-rate taxpayers can continue to earn £1,000 of interest on savings before paying tax in 2021/22. Those paying tax at the higher rate see their allowance remain at £500.

Inheritance Tax (IHT)

Although not an immediate tax, payments made to pensions should remain outside your estate for Inheritance Tax purposes. Inheritance tax is a tax on the estate – which includes money, property and possessions – of someone who has died. The standard rate is 40% on any value of your estate which is above the nil-rate band. Any further drawing, such as dividend or salary, that is not spent will just increase the estate and therefore the amount of IHT payable.

Annual allowance issues

For many, the tapered annual allowance won’t be an issue, but for those who it affects – including those who have already used their standard annual allowance (the total you can pay into a pension pot each year while receiving tax relief) – this will need to be considered.

The benefit of tax relief will be lost on anything over the value of your available annual allowance and carry forward (where some contributions above the annual allowance receive tax relief) which may mean that a pension contribution is less favourable. The annual allowance can’t be ignored, but it shouldn’t be the sole driver for dismissing pension contributions as an option.

Take action now

There are many moving parts to extracting funds from a company. In reality, some – if not all – of the three routes of salary, pension and dividends will be used each year to maximise the use of allowances and provide a useable income and protection for the future.

Speak to a St. James's Place Partner to determine which, if any, of these options is best for you.

Budget 2021: Tax exemptions and allowances checklist

Income Tax: The personal allowance has increased to £12,570. Similarly, the higher-rate threshold – the point at which you will start to pay 40% Income Tax – has risen slightly to £37,701 of taxable income or £50,271 of gross income in 2021/22.

Dividends: The dividend allowance is unchanged at £2,000.

Personal pensions: There were no changes to personal pension tax relief, meaning most people can still get relief on pension contributions worth up to £40,000 a year. The lifetime allowance remains the same at £1,073,100 for 2021/22.

Capital Gains Tax: The Capital Gains Tax annual exempt amount for individuals will remain at £12,300 until 2026. 

Inheritance Tax: The Inheritance Tax nil-rate band for 2021/22 remains at £325,000 and will be frozen until 2026. The residence nil-rate band stays at £175,000.

 

With the new tax year now up and running, there will be many business owners thinking about how to extract the profits they make this year in the most tax-efficient way.

Everyone’s financial journey and situation is different and there are several considerations, depending on your own personal needs. There is often a balance to be struck between taking money out and investing for the future. So, if you run a business, what are the main ways that you can extract profits? There are three options available to you:

  • take more salary
  • pay extra pension contributions
  • pay a dividend

There were no increases to Income Tax or National Insurance in the Budget in March, but there were some tweaks to other tax policies that business owners should bear in mind when deciding how to extract profits. These are outlined below.

Here are some of the main considerations you should make before deciding on the best option for extracting profits from your business.

National Insurance (NI) contributions

National Insurance contributions are paid both by the employer and employee, which means business owners who pay themselves as employees are charged twice. Employer national insurance stands at 13.8%, while employee national insurance is charged at 12% for earnings between £184.01 and £967 a week and 2% for earnings above £967 a week.

In practice, £20,000 would suffer £2,425 employer NI. The residual would then suffer a further £2,109, if below the upper earnings limit. If above the upper earnings limit, however, the employee NI would be only £351.50.

Corporation Tax

The main rate of Corporation Tax will remain at 19% for the tax year beginning 6 April 2021 and will rise to 25% from April 2023 for businesses with profits of £250,000 and over. The rate for businesses with profits of £50,000 or less will remain at 19% and there will be a marginal taper for profits between £50,000 and £250,000.

Salary and pension contributions would generally be classed as ‘allowable business expenses’, and therefore would reduce the amount of Corporation Tax payable. On the other hand, dividends are not a business expense and will be subject to Corporation Tax. With Corporation Tax at 19%, if there was £20,000 to distribute, this would reduce the payment made by £3,800.

With Corporation Tax set to rise, it could become more efficient to extract profits into a pension. However, you should always remember that these funds are not accessible until you are 55.

Income Tax

Subject to certain limits, pension contributions are not taxed immediately, but future pension income will eventually be subject to Income Tax at your marginal rate – although in most cases 25% will be paid tax-free. It should also be remembered that tax-efficient tax growth generated within the pension could increase the eventual tax paid, or subject it to a lifetime allowance charge.

Your salary, meanwhile, will be subject to your marginal rates of Income Tax. If you are earning at or near £100,000, you will need to be careful, as the loss of the personal allowance could make this option less attractive. This means that any earnings above £100,000 will start to erode the personal tax allowance of £12,570 a year, in effect increasing the amount of tax you pay.

The same is true of dividends, although you may also have access to the dividend allowance of £2,000, depending on other dividends received. The higher-rate tax on dividends is less than on salary at only 32.5%.

Through the personal savings allowance, basic-rate taxpayers can continue to earn £1,000 of interest on savings before paying tax in 2021/22. Those paying tax at the higher rate see their allowance remain at £500.

Inheritance Tax (IHT)

Although not an immediate tax, payments made to pensions should remain outside your estate for Inheritance Tax purposes. Inheritance tax is a tax on the estate – which includes money, property and possessions – of someone who has died. The standard rate is 40% on any value of your estate which is above the nil-rate band. Any further drawing, such as dividend or salary, that is not spent will just increase the estate and therefore the amount of IHT payable.

Annual allowance issues

For many, the tapered annual allowance won’t be an issue, but for those who it affects – including those who have already used their standard annual allowance (the total you can pay into a pension pot each year while receiving tax relief) – this will need to be considered.

The benefit of tax relief will be lost on anything over the value of your available annual allowance and carry forward (where some contributions above the annual allowance receive tax relief) which may mean that a pension contribution is less favourable. The annual allowance can’t be ignored, but it shouldn’t be the sole driver for dismissing pension contributions as an option.

Take action now

There are many moving parts to extracting funds from a company. In reality, some – if not all – of the three routes of salary, pension and dividends will be used each year to maximise the use of allowances and provide a useable income and protection for the future.

Speak to a St. James's Place Partner to determine which, if any, of these options is best for you.

Budget 2021: Tax exemptions and allowances checklist

Income Tax: The personal allowance has increased to £12,570. Similarly, the higher-rate threshold – the point at which you will start to pay 40% Income Tax – has risen slightly to £37,701 of taxable income or £50,271 of gross income in 2021/22.

Dividends: The dividend allowance is unchanged at £2,000.

Personal pensions: There were no changes to personal pension tax relief, meaning most people can still get relief on pension contributions worth up to £40,000 a year. The lifetime allowance remains the same at £1,073,100 for 2021/22.

Capital Gains Tax: The Capital Gains Tax annual exempt amount for individuals will remain at £12,300 until 2026. 

Inheritance Tax: The Inheritance Tax nil-rate band for 2021/22 remains at £325,000 and will be frozen until 2026. The residence nil-rate band stays at £175,000.

 


The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.


The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.


The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.