Your Money and Your Business

3. Extracting Profits

This is probably the main financial-planning issue for owner-managers.

3.1 Look at your taxable profits, consider what you need to keep in the business and then what you need as an individual.

3.2 If you run a limited company, consider whether to take profits and if so, how.

• If you need money, you should pay yourself a salary or dividend. (Otherwise it may be better to make other investments, such as in a pension scheme.)
• Both attract income tax, but dividends can be cheaper for some small firms, as no employer's National Insurance contributions are payable.
• The choice will depend on your individual earnings and corporation tax position - ask your accountant for advice on this.
• Dividends do not qualify as relevant earnings for pension purposes (but see 4.3).

3.3 Take advantage of a lower-earning spouse's tax allowances and reliefs.

• Consider paying them a salary to make use of their personal allowance for income tax and the National Insurance threshold. You may have to justify levels of remuneration to HM Revenue & Customs.
• Consider transferring shareholdings or other income-generating assets to your spouse to benefit from lower income-tax bands. Transfers must be outright to be effective.

3.4 Loan-backs from a small self-administered pension scheme can be an effective and tax-efficient way of making sure your company has the money it needs. For example, say you have profits of £500,000 and the company needs £250,000. You could put £500,000 in a pension fund and pay no tax. You then loan back 50 per cent. Without such a scheme, you would need to retain more than £300,000 gross to keep £250,000 in the business.

• Loan-backs must be at a commercial rate of interest. The interest goes into the pension fund tax-free.
• A loan-back must be for a 'genuine business purpose'. Saying it is for cashflow is unlikely to satisfy HM Revenue & Customs - but stating it is for, say, PCs should be fine.

3.5 Look at how you remunerate your staff.

• Some elements of a remuneration package can cost you less than the value of the benefit received by the employee: mobile phones or computers, or pension contributions, for example.
• But others can be more costly.