PROFIT EXTRACTION

Having invested in a business with their own funds, there comes a time when the enterprise is running at a sufficient profit that it allows the client to extract money from its profits. There are a number of ways that the client can do this, and the most popular is a combination of salary (that attracts both NICs and Income Tax) and dividends, or a bonus payment. Extracting money from company profits incurs a charge and where the extraction amounts are significant, the charge can be considerable.

At the beginning of the 2016 tax year, changes to the way in which dividends are taxed were implemented. A tax free allowance of £5000, with tax charges increasing from 7.5% to a maximum of 38.1% above this threshold, replaced the historic arrangement. This approach has made it less advantageous for business owners to extract significant profits using dividend distributions.

Bonus payments will be subject to NICs, including Employer’s NICs, as well as Income Tax.

Clients who are company owners could consider other methods of profit extraction. These could include:

Making contributions to a pension arrangement
Charging interest on a loan made by the client to the company
Charging the company a fee to rent the client’s premises
Selling assets to the company

Lancaster Knox works with owners of profitable companies to help them to manage their affairs so that they can access more of their wealth from the enterprise they have established and worked hard to make successful.