If you’re a business owner operating a personal or family company, chances are you’re frequently wrestling with how to go about extracting profits efficiently. As we approach the 2024/25 fiscal year, it’s time to explore strategies to optimize profit extraction whilst keeping your tax obligations in check.
Paying Salaries
One of the simplest and most effective ways to extract profits is through salary. This approach serves a dual purpose: your company can deduct the salary and any associated employer’s National Insurance as business expenses, and if the salary doesn’t exceed your personal allowance, you’ll avoid paying tax on it.
In the 2024/25 financial year, if you choose to pay yourself a salary of £12,570 (assuming your personal allowance is £12,570), you can comfortably do so without worrying about tax and employee’s National Insurance. However, you may have to pay some employer’s National Insurance if you don’t qualify for Employment Allowance.
The Benefits of Dividends
Once your salary threshold has been reached, the smartest way to extract additional profits is through dividends. These are taxed at lower rates compared to salary and bonus payments and have their own tax-free allowance.
For instance, in the 2024/25 year, up to £500 dividends can be received tax-free. Beyond that, dividends are taxed at a rate of 8.75% for the basic rate band, 33.75% for the higher rate band, and 39.35% for the additional rate band. This strategy is dependent on your company’s retained profits being at least equal to the proposed dividend.
Exploring Other Profit Extraction Options
While salaries and dividends are popular methods, other options can be just as advantageous according to your specific scenario. These include extracting profits as benefits in kind or as rent if your company is run from a home office. Moreover, having your company make pension contributions on your behalf can also prove to be a tax-efficient way to extract profits.
Remember, there’s no “one size fits all” approach to profit extraction. The key lies in understanding different strategies and tailoring the one that best aligns with your personal or business situation. As we steer towards the 2024/25 fiscal year, it’s time to plan a more efficient profit extraction strategy!
If you would like to discuss your options our experts can help.
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*The content in this article is for your information and education only and is not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such.
