Whether you are considering extraction of profits from a company on a tax year basis or aligned to the company year end, there are a number of issues that should be considered.
Salary: National Insurance contributions are expensive but salary can be deducted from taxable profits in the company, so if profits are taxed at the marginal small companies rate (currently 29.75%), there is very little difference between extracting profits by way of salary or dividend for higher rate taxpayers.
Bonuses: where annual bonuses are payable, the bonus must be due and payable before the company year end, even if the specific amount has not been decided. This is necessary to benefit from tax relief against the profits of the period. The bonus must always be paid within nine months of the year end to secure the tax deduction in the company. Where bonuses are normally paid annually, you might wish to consider the implications of the higher rates of tax applying in 2010/11 and accelerate bonuses into the current tax year if appropriate.
Dividends: the current effective rate of tax on a cash dividend is 25% of the amount received. This is payable as part of the self assessment liability for the shareholder. Next year the tax on a cash dividend will rise to 36.1% if the dividend falls into the 50% tax rate band (for taxable income over £150,000). Again, accelerating substantial dividends into the current tax year might be appropriate.
Benefits in kind: some benefits in kind are still quite tax efficient, including the provision of a company mobile telephone and a car with emissions of no more than 120g/km of CO2. In fact if the car has emissions of no more than 110g/km it will also attract 100% first year allowances in the company in the year in which it is purchased new. (The allowance is not available on second hand cars).
Pension contributions: the same test applies to pension contributions for director shareholders as applies to the spouse of a shareholder/director. Provided the total salary package (ignoring dividends) is reasonable for the input of the director into the company, then all salary plus pension contribution should be allowed against profits for tax purposes. Remember that there is an annual limit on pension contributions, which is currently £245,000. Contributions in excess of this will trigger a tax charge on the member at a rate of 40%. You will also need to take care if your income is in excess of £150,000. From 2011 company pension contributions will be regarded as part of the salary package for those with income in excess of £130,000, so you may wish to make contributions now to top up your pension, subject to the anti forestalling rules.
Tags: Dividends, National Insurance Contributions, Payroll, Pension Benefits, Pension contributions, tax planning
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