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As business owners or company directors, it is common to be seeking the most efficient ways to profit from your company. Especially during the COVID-19 pandemic, careful planning is important for your business to reap its best rewards.

In this blog post, let’s take a look at the different methods through which you can maximise profit-extraction and improve your organisation’s financial standing.

The Newest Updates in 2020/21

• The personal allowance is maintained at £12,500.
• Corporation Tax remains at 19% after plans to reduce the rate to 17% from April 2020 were scrapped.
• The dividend allowance remains at £2,000.
• The pensions lifetime allowance is increased to £1,073,100.

Extracting Profits from Your Business

Profits from your company are available to you after it is subjected to a Corporation Tax of 19%. After which, you can draw out the remaining profits available from your organisation. Here are some tax-efficient methods you can undertake for your business:

1. Salaries and Remuneration

One of the most common ways of extracting profits from your company would be from salaries and remuneration. Although most of us are familiar with the way salary is taxed, it is important to note the various thresholds that are taxed at different rates.

A relatively tax-efficient strategy would be to ensure that salary is above an employee’s lower-earning limit but still under their primary-earning threshold. This will reduce the amount of income tax attracted.

2. Dividends

On the other hand, dividends are sums taken out of the reserve profits of a company. Whilst you can declare dividends to shareholders whenever profitable, it is important to note that only the first £2,000 of any dividend is tax-free.

You can find how dividends in excess of this amount are taxed below:

Basic rate: 7.5%
Higher rate: 32.5%
Upper rate: 38.1%

However, taxes on dividends are still lower than those on salaries overall - which would explain its popularity in terms of profit-extraction choice. Check that your dividends are properly constituted before planning and strategising your profits.

3. Pensions

Lastly, simply investing in pension contributions draws profits for your business. In the 2020/21 tax year, you can contribute up to £40,000 per year annually and £1,073,100 in a lifetime. After which, your company can enjoy deductions based on the contributions you’ve made.

What is the most efficient profit extraction strategy for your business?

Whilst these three primary options are effective methods in gaining profit for your business, there are other forms of tax-relief that exists - shares, rent, goodwill, capital allowances and more.

If you would like further information or consultation on tax-free benefits and profit-extraction for your company, Right Accounts helps you with your needs.

You can contact us here.