Effective extraction strategies

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

  • Effective extraction strategies
  • Background
  • Summary of profit extraction options
  • Practical profit extraction planning considerations
  • Extracting profits by way of salary and / or dividends
  • ‘Unearned’ income and NIC
  • Family members
  • Pensions and share options
  • Benefits in kind
  • Loans from the company

Extraction of companies’ profits will result in a tax charge and often National Insurance contributions (NIC) being levied. Careful planning is crucial. This is generally a complicated exercise as there are many different factors to consider. As well as considering the tax impact of the chosen profit extraction strategy, it is important not to lose sight of the commercial, legal or long-term implications.

Guidance on strategies for profit extraction starts from Simon’s Taxes D6.640 onwards (subscription sensitive).

Background

Company profits are subject to corporation tax at a single rate of tax.

Historically, the rate of corporation tax was dependent on the level of profits until the introduction of the single uniform main rate of corporation tax from 1 April 2015. The main rate from that date was 20%. This reduced to 19% with effect from 1 April 2017 and is due to reduce to 17% with effect from 1 April 2020.

For further guidance and the historic position, see the Computation of corporation tax guidance note.

Once profits are extracted, they are subject to taxation again in the hands of the individual proprietor. The rate and timing of the tax / NIC liability depends on the chosen method of profit extraction.

Summary of profit extraction options

There are a number of methods for an owner-manager of a company to extract profit. These can be regarded as primarily falling into two categories: capital and income. These will often result in capital gains tax or income tax consequences, and the choice of profit extraction method may be specifically chosen according to the consequences.

Capital

The following are the methods generally used to extract capital:

  • informal winding up
  • purchase of own shares

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