The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
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.
Profits within a company will be taxed under corporation tax which currently is 19%, this rate will continue to apply up to and including FY 2021. Once profits are extracted, they are subject to taxation again in the hands of the individual owner. The rate and timing of the tax / NIC liability depends on the chosen method of profit extraction.
For further guidance on the calculation of corporation tax, see the Computation of corporation tax guidance note.
There are a number of methods for an owner 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.
The following are the methods generally used to extract capital, usually when the business has ceased, the owner has retired or is passing the business on to others:
informal winding up, see the Informal winding up guidance note
purchase of own shares, see the Purchase of own shares ― overview guidance note
liquidation, see the Administration and liquidation guidance note
proceeds from external sale, see the Tax implications of share sale guidance note
The following are the methods generally used to extract income on an ongoing basis to provide funds for the owner:
salaries and bonuses
benefits in kind (BIK)
loans from the company
interest on loans to the company
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