As the 2023/24 tax year draws to a close, directors of personal and family companies are advised to review their profits extraction strategy and to consider whether it would be worthwhile to withdraw further profits from the company before the current tax year comes to an end on 5 April 2024.

A typical profit extraction strategy involves taking a small salary and withdrawing further profit as dividends. It may also be tax efficient to extract profits in the form of benefits in kind or for the company to make pension contributions on the director’s behalf.

For 2023/24, where the director has the standard personal allowance and that has not been utilised elsewhere, the optimal salary is one that is equal to the personal allowance of £12,570. As this is also the primary threshold for Class 1 National Insurance contributions, there will be no employee’s National Insurance to pay on the salary.

If the company is eligible for the National Insurance employment allowance and this remain available, there will be no employer’s National Insurance to pay on a salary of £12,570. However, if the allowance is not available or has been used elsewhere, employer Class 1 National Insurance contributions will be payable to the extent that the salary exceeds the secondary threshold of £9,100 at the rate of 13.8%. On a salary of £12,570 this equates to £478.86. However, this is a cost worth paying as both salary payments and employer’s National Insurance are deductible in computing the company’s taxable profits, and the rate of secondary Class 1 National Insurance is less than the rate at which corporation tax would otherwise be payable on those profits.

Once a salary at the optimal level has been paid, it is more efficient to switch to dividends if you wish to extract further profits for use outside your company. This is only an option if you have sufficient retained profits from which to pay the dividends. These are profits on which corporation tax has already been paid.

All taxpayers have a dividend allowance of £1,000 for 2023/24 and dividends covered by the allowance are taxed at a zero rate. If profits permit, it is advisable to pay dividends to make use of this allowance, as if it is not used in the tax year it is lost. The dividend allowance falls to £500 from 6 April 2024; consequently, it may be preferable to take dividends before this date rather than delay the payment if the 2023/24 dividend allowance remains available.

Once the dividend allowance has been used up, dividends are taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.

If your corporation tax rate has increased as a result of new rules applying from 1 April 2023, but your profits are unchanged, the higher tax rate may mean that you do not have the retained profits available to maintain dividends at the level paid in previous years.

It can also be very tax efficient for your company to make pension contributions to your personal pension if you have not used your available annual allowances in full. There is no tax for you to pay, and the company can deduct the contributions in working out its taxable profits.

You could also consider making use of tax exemptions for benefits in kind, such as those for mobile phones and trivial benefits, to extract further profits in a tax-free fashion.

We can help you formulate a tax-efficient profit extraction strategy tailored to your personal circumstances. Contact us at enquiries@ardury.co.uk to discuss further.