While not easy, it is possible to take profits through the hard border that surrounds a company without paying excessive tax
There is a hard border around company assets. If you want to move cash out, you mostly have to pay some tax. And now, one avenue – dividends – is about to get more expensive, with a cut to the dividend allowance from £5,000 in the current tax year to just £2,000 from 6 April.
But that does leave time to review how to get money out of a company before the year end. Dividends in general offer better value than salary or bonus as a means of achieving this.
Above the allowance, tax on dividends is at special rates, reflecting the fact that they are not deductible in computing a company’s profits – unlike a salary or bonus. Dividends also attract no employer’s or employee’s National Insurance contributions.
Of course, dividends are all very well if the people who deserve it are also the people who own the shares. A company can pay a salary and bonus to any employee regardless of whether they own shares. Dividends normally have to be paid to shareholders in proportion to their shareholding, unless those who should forgo a dividend are not prepared to waive it.
Note to company owners: be careful about who you give shares to.
Another snag owners can overlook is the need for the company paying a dividend to have enough retained profits from which to pay them.
Most company owners who should draw dividends for the current tax year have probably done so already. But if using the dividend allowance has been overlooked, there are a few days left to make good the omission.
Salary and bonus
Salaries and bonuses involving income tax and NI can look like expensive ways to take money out of a company, so it is important to work out the most tax-effective salary level, which will vary according to individual circumstances.
In some cases, it may even be worth paying a salary and bonus above the level of the personal allowance (£11,500 in 2017/18 and £11,850 next tax year). There is no substitute for doing the sums on an individual basis.
One factor to consider is the extent to which the NIC employment allowance is available to cover the first £3,000 of employer NICs. It has to be claimed and is not available if the company’s sole employee is also a director.
Another factor is making sure the shareholder director has a full contribution record for the purposes of pension and other state benefits.
To do this, the salary needs to be at least at the lower earnings limit for class 1 NICs. That is £113 a week (£5,876 a year) in 2017/18 and £116 a week (£6,032 a year) in 2018/19.
It is also worth looking at paying spouses and children who work for the firm, as long as their remuneration can be justified and meets National Living Wage requirements.
Benefits in kind
Benefits in kind can be an attractive way to extract relatively modest but worthwhile amounts of profits. These are taxed on their “cash equivalent”, which mostly means the cost to the employer of providing the benefit.
Some benefits in kind have special rules for valuing their cash equivalent: for example, company cars and fuel, living accommodation and some loans. Some are exempt and therefore free of income tax and NICs. Generally, however, they are subject to class1A NICs – payable by the employer and not the employee.
The provision of benefits in kind is also mostly deductible for the employer. Mobile phones, childcare and some very fuel-efficient cars are typically free of income tax and NICs; others may be taxed on an advantageous basis.
But watch out for the recently introduced rules countering salary sacrifice/flexible benefit arrangements. The effect of these is to take away the tax advantages of virtually all benefits in kind if the employee has given up pay or is able to swap cash for the benefit.
The exceptions are pensions savings and employer-provided pensions advice, childcare and childcare vouchers, bicycles under the Cycle to Work scheme and ultra-low emission cars.
Any director or employee who uses their own car should always claim the mileage allowance of 45p up to 10,000 miles and 25p above that.
Obviously, employer contributions into registered pensions make lots of sense, but watch out for the potential impact of the lifetime allowance – especially for younger shareholder directors.
Lending and borrowing
Meanwhile, if a shareholder director lends money to the company, it makes sense to charge interest on the loan. It should be at a realistic rate, but if it is the only source of savings income for the individual, it might well qualify for the savings allowance (£1,000 for a basic rate taxpayer and £500 for a higher rate taxpayer) and possibly even the 0 per cent starting rate on the first £5,000 on savings income.
Borrowing from the company on a short-term basis may be possible but it is fraught with hazards and should never be undertaken without seriously competent advice.
It is perfectly possible to take profits through the hard border that surrounds a company without paying excessive amounts of tax, but it does take some effort.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum