Extracting cash from your family company

Using dividends for tax efficient cash withdrawal

It isn’t new news that dividends are a tax efficient way to draw money from a limited company; it is in fact the primary reason that most dentists and medical consultants decide to trade in this way. Dividends attract a 10% tax credit and no further tax is due within the basic rate tax band, 14/15: £31,865. Dividends taken above this basic rate threshold but below £150,000 are subject to higher rate tax at 32.5% (after the tax credit, the effective rate is 25%) and for anything above that, the rate is 37.5% (after the tax credit, the effective rate is about 30%) Even these higher rates are competitive against income tax, currently 40% and 45%.

For more information on 14/15 tax rates, read our related article on The 2014 Budget Summary.

Two things when considering dividends are:

1. Dividends must be paid from retained profit, so the company must have sufficient funds to cover the dividend
2. Dividends must be paid in amounts according to shareholdings.

Dividends and National Insurance

The other benefit to using dividends to extract your cash is that there is no National Insurance (NI) due for the employee or the employer. 

Using salary and bonuses for tax efficient cash withdrawal

Whilst extraction via dividends makes use of lower tax rates, paying a salary or a bonus can also make up part of a remuneration package. Salaries and bonuses are subject to typical income tax rates, after the personal allowance and unfortunately NI is due for both the employer and employee, which can make this a more expensive option.

Corporation tax relief on salary, bonuses and NI

However, corporation tax relief is gained from the full amount of salary, bonus and NI, unlike that of dividends. Plus, salaries and bonuses can be allocated per director and don’t have to be allocated in alignment with the shareholding. This can give some flexibility when extracting money from your limited company. Read our related article relating to the timing of paying a bonus for early corporation tax relief.

Combination strategy of dividends and salary

A typical set up for a family limited company is to pay a minimum salary to each director of between £109 and £148 per week (14/15), which falls under or just above the NI limit and to then pay dividends after that until the personal allowance and basic rate tax band have been used up. Read our related article on how to split your salary and dividends for optimum tax efficiency. Broadly speaking a combination strategy package of £38,500 can be achieved per director, per year with a zero personal tax contribution.

Using capital extraction for cash withdrawal

There are benefits to extracting capital from your company rather than income. This is because the rates of Capital Gains Tax (CGT) are 18% and 28%, currently, which result in much lower tax payments than paying income tax at 20%, 40% and 45%. There is also an annual allowance of £10,900 (14/15) on CGT, which means some capital can be extracted tax-free.

Capital extraction for companies ceasing to trade

Unfortunately, for companies continuing to trade, capital extraction options are limited. There’s the option to sell shares back to the company but this comes with complications and most certainly needs the assistance of an accountant. If your company is due to close though, opportunities for capital extraction widen but you will still need to seek help from your accountant.

For more information

Need help extracting income or capital from your limited company? The Figurit team is happy to help apply bespoke calculations to your circumstance. Call today on 020 7376 9333.