Company profit extraction

Review your approach to plan for the reduction in the dividend allowance

The reduction in the dividend tax allowance from £5,000 to £2,000, announced in the Spring Budget, will be effective from April 2018.

So with the 7.5% dividend tax starting when dividends exceed just £2,000 a year, company owner/managers need to review the mix of salary, dividends and other ways they withdraw their incomes.

Of course, this will always depend upon their individual circumstances, but here are a few suggestions:

  • Salary is probably not the answer
    With employers NIC alone currently payable at 13.8%, taking a higher salary is not going to be a more tax efficient route than dividends. Sometimes dividends are not practicable, but otherwise salaries are a more expensive option.
  • Interest on directors’ loans
    This is not subject to the dividend tax or NIC, and subject to other income at least the first £500 a year should be tax free. If the company owes you more than £10,000 you should consider this.
  • Spouses and civil partners
    If you haven’t already considered whether gifting shares to split dividend income would reduce the tax payable, do so now.
    You can’t save tax by paying dividends on shares you have gifted to your minor children, but once they reach age 18, consider this too.
  • Alphabet shares
    Having different classes of shares (A shares, B shares and so on) can help target dividends whilst limiting, for example, loss of voting control. But be warned – there is anti-avoidance legislation to prevent this being abused to divert income or pay disguised remuneration.
  • Repayment of share capital
    If you have significant paid up share capital, it is possible for the company to go through a process to repay this to shareholders, often with no tax charge.
  • Pensions
    If you don’t need the cash for your immediate spending plans, and subject of course to the contribution limits, the tax advantages of pension schemes make them one of the most tax efficient ways of extracting funds from your company. You should also consider contributing for family members employed by the company, provided their overall pay package is in line with the work they do.
  • Retain profits in company
    If you don’t need the income, you might consider rolling profits up in the company using them in the long term either to help fund an exit, or simply with a view to retaining the company as an investment vehicle.