Family and Personal Companies

Tax Efficient Profit Extraction

If you operate your business through a personal or family company, you will need to extract the profits if you want to use them personally outside your company. There are various ways to do this, some more tax efficient than others. The optimal strategy will depend on your personal circumstances.

A popular strategy is to take a small salary and to extract further profits as dividends. This will be tax efficient if your personal allowance is not used elsewhere. It will also be beneficial to take a salary of at least £6,396 if you do not have the requisite 35 qualifying years to give you a full state pension.

For 2023/24, if your personal allowance is available, it will be tax-efficient to take a salary that is equal to the personal allowance of £12,570. As this is also the primary threshold for National Insurance, you will not pay any employee contributions on your salary.

If your company does not qualify for the National Insurance Employment Allowance, it will need to pay employer contributions to the extent that your salary exceeds the secondary threshold of £9,100. These are payable at a rate of 13.8%. However, if your company qualifies for the Employment Allowance, there will be no secondary Class 1 National Insurance to pay.

Once you have paid a salary of £12,570, it is more tax efficient to extract further profits as dividends. These will be tax-free to the extent that they are sheltered by the dividend allowance, set at £1,000 for 2023/24. Thereafter, they are taxed at the appropriate dividend rate – 8.75%, 33.75% or 39.35% depending on the tax band in which they fall.

Contact us at enquiries@ardury.co.uk to help you formulate a tax efficient profit extraction strategy for 2023/24.