Extract profits from your business and minimise your personal tax liability

The new rules on pensions, the IR35 regulations, and the question of salary/bonus versus dividend are all factors which can make the task of extracting profits from your company harder to get right.

In theory, the new pension rules mean that instead of funding pension savings yourself out of post-national insurance contributions (NICs) income, your company could contribute free of NICs (with a typical saving in the region of 13.8%). However, under pre-existing rules, HM Revenue & Customs is challenging 'extraordinary' contributions and arguing for dis-allowance of tax relief for the company in circumstances where company contributions have previously been at a significantly lower rate.

The position on IR35 continues to be controversial, but in some cases personal service companies are being dissolved as 'consultants' return to the payroll.

The question of whether it is better to take a salary/bonus or a dividend still requires careful consideration. A dividend is paid free of NICs, which would typically cost 13.8%, or even up to 23.8% in combined employer and employee contributions. The effect can be a considerable saving (hence IR35) but there can also be an increase in the value of the shares of your company if valuation is ever necessary (eg. for inheritance tax). 5 April is your last date for paying a 2008/09 dividend, and higher rate tax on that dividend will not be due until 31 January 2010.

Call us now about this and other ways to extract profits from your business tax-efficiently.