Planning for your business

Running a business requires hard work and dedication, so it's important to reap the financial rewards of your endeavours. Here we consider how to extract profit in a tax-efficient manner.

Have you considered a dividend over a salary or a bonus?

Some may choose to take a dividend over a salary or bonus. Dividends are paid from the profits available after Corporation Tax is paid. A salary or a bonus generally creates tax charges for the company, carrying up to 25.8% in combined employer and employee national insurance contributions (NICs). Dividends, however, are paid free of NICs.

In September 2021 the government announced an increase to the rates of tax paid on dividends by 1.25% from 6 April 2022 to help fund the new planned investment in health and social care. The new rates will therefore be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.

Other ideas for profit extraction

There are a handful of alternative profit extraction ideas for individuals to consider.

These include:

• Making pension contributions – employer pension contributions often prove to be very tax-efficient when it comes to extracting profit from a company.
• Taking incorporation into account – self-employed individuals or those with partner status may want to consider incorporating. This may provide more scope for saving or deferring tax.
• Utilising tax-free allowances such as mileage payments, which apply when you drive your own car or van on business journeys.
• Making the most of property – you are entitled to receive rent up to the market value on property that is owned by you and used for business purposes.

Give to charity

If you make a charitable donation under the Gift Aid scheme, the charity can claim back 20% basic rate tax on any donations. Using Gift Aid can also generate a refund for higher rate and additional rate taxpayers. Higher rate taxpayers can claim back the tax difference between the higher rate and basic rate on that donation.

A cash gift of £100 could result in a £25 tax refund for a higher rate (40%) taxpayer under the Gift Aid scheme, in addition to a £25 payment to the charity generated by the taxman. Donations by Scottish taxpayers paying at the starter rate of 19% will be treated in the same way as 20% taxpayers in the rest of the UK. Scottish taxpayers using Gift Aid who pay tax at a rate higher than 20% can claim the difference between this and the basic rate.

It is important that all donors check that they have paid enough tax to cover the Gift Aid claim.

However, there may be other tax implications to consider, so care needs to be taken. Please be sure to talk to us before acting.