How Can I Extract Profits From My Limited Company? Part 2

How can I extract profit from my limited company? Part 2.

Part 1 of this article examined some of the primary options for extracting profits from a limited company including Directors Loan, salary and dividends. The company is also able to extract profits in the form of tax free benefits. This article will explore tax free benefits in more detail.

Disclaimer. Rates and allowances are correct for tax year 20/21 therefore ensure you check with your accountant if you are claiming them after then.

Tax Free Benefits. There are many tax free benefits or ‘perks’ available to directors of limited companies. They are tax free in the sense that there is no tax charged on the directors personally. Tax free benefits present an indfirect way for a property investor to extract profits from their limited company in the form of perks which are tax neutral from a personal tax perspective.

Mobile Phone. Each employee can be given one mobile phone (or PDA) by the company. Limits should be agreed on an acceptable amount of private calls and all bills should be in the companies name.

Computer/Tablet. If justifiable for the purposes of work then an employee can be given a work computer or tablet to work on.

Refreshments. Refreshments can be provided at a reasonable amount throughout the working day.

Subsistence. When travelling with work you are able to claim for subsistence costs. Travel is classified as travel between workplaces, work appointments and any other business activity. Commuting does not count unless home qualifies as a workplace or temporary workplace.

Annual Party or Function. A company can hold an annual function so long as the total cost does not exceed £150 per head, per year. This amount is inclusive of VAT and all associated costs such as travel. This is limited to this amount rather than being an allowance and therefore if the party exceeds £150 per head per year, then the full amount will be taxable. The event should be open to all staff rather than just directors and the primary purpose should be to entertain staff.

Trivial Gifts and Benefits. The company can issue gifts such as vouchers but make sure it is a voucher that can be exchanged for goods rather than cash vouchers. The cost or average cost per person should be no more than £50 (including VAT). This amount should not be exceeded or the whole benefit will be taxable. There is an annual cap of £300 for directors, officeholders and employees who are members of their family or household,

Pensions. The company can make contributions to a pension on the employees behalf. Any pension contributions made by the company are fully tax deductible and they incur no Benefit In Kind tax or NIC’s. The employee should ensure that any contributions are within their annual and lifetime pension allowance. The company can also pay up to £500 per year for pension advice for the employee.

Electric Car or Van. For 20/21 a company can provide an electric car or van to employees which is free of benefit in kind tax so long as the vehicle is free from CO2 emissions. Note that the rate of Benefit in Kind tax will increase from 21/22 to be 1%. Lease payments can be made by the company and are fully tax deductible by the company. The company is also able to provide a personalised number plate which is tax free.

Optimal Profit Extraction. Over this 2 part article we have explored directors loans, salary, dividends and tax free benefits as ways for a company owner to extract profits from their company in a tax efficient manner. Each investor is likely to have a different optimum profit extraction depending on their own personal tax position.

Optimum profit extraction to remain basic rate taxpayer. Firstly we will look at a method for paying the minimal amount of tax, no NIC’s but still get the benefits of paying NIC’s.

£8,788 salary. This is the optimum salary from a purely tax perspective as would mean that the company and director pay no NIC’s but the director still has the benefits of NIC’S such as the state pension. Assuming no other income the director will not pay any tax on this amount as it will be under the personal allowance threshold of £12,500. The salary could be increased up to this amount but this would lead to paying NIC’s.

£1,000 Interest on directors loan account. The director will be able to receive up to this amount of interest without having to pay any tax as it is within the basic rate interest allowance.

£40,212 Dividends. The director is able to benefit from the £2,000 dividend allowance and will not pay any tax on this amount. They will be able to be paid a further £38,212 in dividends and pay dividend tax at the basic rate of 7.5%.

Breakdown

Salary £8,788

DLA Interest £1,000

Dividends £40,212

Total £50,000

Tax

£15,500 @ 0% - Personal allowance, savings allowance and dividend allowance.

£37,500 @ 7.5% = £2,812.50

This would leave the director with £47,187.50.

The above would obviously require the company to have sufficient profits to pay this dividend after paying for all other costs including tax free benefits.

Top Tip. If you are planning on leaving full time employment to focus on property then you will need to have a discussion with a mortgage broker in order to understand whether income solely from property would be acceptable for lenders (it is likely to reduce the choice of lenders significantly) and if so what amount of salary will be acceptable. It may be significantly higher than the amount described above. If this is the case then the director would need to swap some of the dividends for salary and suffer the higher amount of tax and NIC’s. The lender may also have a requirement for a minimum amount of time that the investor has drawn salary from the company and so remember to plan accordingly.

Optimum profit extraction to pay no tax. We will now look at a way to extract £20,500 without paying any tax, assuming no other income outside of this property company. If the company is run by a husband and wife team then both could receive the same benefits, doubling the profit extraction to £41,000. This method will also allow the owner to get entitlement to the benefits of NIC’s without actually paying any.

£8,788 salary. As per the previous example. If gaining entitlement to state pension is not important then this could be replaced with interest to prevent administrative burdon of payroll.

£9,712 Interest on directors loan account. The director will be able to receive up to this amount of interest without having to pay any tax. This amount is made up of:

£3,712 balancing figure to bring income up to the basic rate allowance.

£5,000 starting rate for savings. Here as long as you earn under £17,500 you can earn this amount of interest without paying any tax.

£1,000 personal savings allowance.

£2,000 Dividends as per dividend allowance.

Breakdown

Salary £8,788

DLA Interest £9,712

Dividends £2,000

Total £20,500

Tax = £0.

The above would obviously require the company to have sufficient profits to pay this dividend after paying for all other costs including tax free benefits.

Conclusion. It is important that property investors plan for how they will extract profits when the time comes around to ensure that this is done in the most tax efficient way possible, whilst also ensuring that they are able to meet lenders criteria to gain finance.

If you need help with calculating the optimum profit extraction to suit your own personal situation, then this is included in our ongoing advice and support for our limited company packages. If you would like to discuss this then please get in touch with us.

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