{"id":584,"date":"2016-04-01T12:00:00","date_gmt":"2016-04-01T11:00:00","guid":{"rendered":"https:\/\/lancasterclements.co.uk\/?p=584"},"modified":"2016-03-24T10:57:34","modified_gmt":"2016-03-24T10:57:34","slug":"profit-extraction-issues","status":"publish","type":"post","link":"https:\/\/www.lancasterclements.co.uk\/profit-extraction-issues\/","title":{"rendered":"Profit extraction issues"},"content":{"rendered":"

\u00a0Pro\ufb01t extraction issues and the new regime<\/strong><\/h1>\n

A key advantage of trading as a company is that the owners, who are generally both shareholders and directors, only suffer tax and NIC on any profits extracted from the company, so any profits retained in the company are sheltered from personal tax rates. If funds are required to reinvest into the business or to repay debt, the only immediate tax hit is the corporation tax charge of 20%.<\/h4>\n

However we all need funds for our personal outgoings so there will be another level of taxation when the profits are extracted won\u2019t there? This is where planning comes into play. Dividends are often used in combination with remuneration to obtain the most tax effective extraction of profits when the business is carried on through a company. For many years it has been attractive to pay a small salary to allow the tax efficient use of the personal allowance, to provide a corporation tax deduction for the company but not to pay NIC. This means a salary of \u00a38,060 in 2015\/16, corresponding to the primary NIC threshold (and 2016\/17 as the threshold has not changed). The payment of this level of salary also provides a qualifying year entitlement to the state pension.<\/p>\n

When the new tax regime for dividends is introduced on 6 April 2016 many director-shareholders will find that the tax bill on the dividends will be higher than is the case for the 2015\/16 tax year. So does this change the strategy of low salary and the balance as dividends?<\/p>\n

We now have draft legislation for the new regime which explains the finer points of the proposals and how the new \u00a35,000 Dividend Allowance interacts with other tax rates. The Dividend Allowance does not change the amount of income that is brought into the income tax computation. Instead it charges the first \u00a35,000 of dividend income at 0% tax – the dividend nil rate. This means that:<\/p>\n