Extraction of funds following incorporation

By Tolley
OMB_tax_img

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Extraction of funds following incorporation
  • Salary
  • Dividends
  • Rent
  • Interest
  • Pension contributions

This guidance summarises some of the different methods of extracting funds from a newly formed company following incorporation of a sole trade or partnership. Detailed guidance on extracting profits from owner-managed companies can be found in the Effective extraction strategies guidance note.

Salary

Salaries can be paid to the directors, either as regular sums or as more infrequent bonuses, and are tax-deductible for the company. If the director has an explicit employment contract, he will be expected by the Department for Business, Energy and Industrial Strategy to receive the National Minimum Wage (NMW) in respect of work carried out under that contract, so it would not be possible to pay such a director solely by way of dividends.

The requirements of Real Time Information (RTI) have made the payment of salary very rigid, and payments must be reported when made. There is also additional administration under this system that may negate any tax benefit from paying a nominal salary. This should be assessed on individual circumstances.

A salary / bonus is subject to income tax in the hands of the directors.

In addition to the Class 1 NIC payable by the directors / employees, the company will have to pay Class 1 secondary NIC on the gross salary / bonus.

More on Incorporation: