Year End Tax Planning: Corporation Tax & Profit Extraction
It is important for businesses and entrepreneurs to review their financial and taxation position as we approach the end of another financial year. Whilst in our last article in this year-end tax planning series, we took a look at ways to help your family with your tax planning measures, in this article, we highlight some of the issues that you should consider when it comes to corporation tax and profit extraction.
Corporation tax rates
The corporation tax rate is 25% for companies with profits over £250,000. The small profits rate of 19% is payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.
The small profits limit of £50,000 and the upper limit of £250,000 will be divided equally between your associated companies. For example, if there are five associated companies, the effective limits will become £10,000 and £50,000 per company. Broadly speaking, associated companies are those in the same group of companies or are under common control.
Profit extraction - dividend taxation
The regime for taxing dividend income, whether from a family company or received from quoted investments, is as follows:
• The dividend tax allowance means the first £500 of dividends are tax free
• For dividends above £500, the rates of tax on dividend income are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
Dividends are normally the most tax efficient way of extracting profits from a family company because of the impact of national insurance contributions. In each case, the individual circumstances will need to be considered.
There are a number of implications depending on your circumstances:
i) Salary
In taking dividends, the optimum salary is up to £12,570 on which no employee national insurance contributions will be payable.
Employer’s national insurance contributions will increase from 6 April 2025 as the secondary threshold reduces and any earnings over £5,000 will attract a 15% charge, reducing the attractiveness of salary against dividends.
The level of pension contributions that may be paid personally will be affected by a low salary. Consideration could be given to salary sacrifice with the employer making the pension contributions.
ii) Adult children
In circumstances where your adult children can acquire shares in your family company, the first £500 in dividends are tax free. To the extent their basic rate band is unused, the tax rate is 8.75%. This might prove a tax efficient way of transferring income to your children without incurring any dividend tax on that income yourself.
As a variation on this approach, dividends within the basic rate band would provide greater funds, albeit subject to a 7.5% dividend tax charge, and could fund post 18 education or help towards a first house purchase.
iii) Gift Aid
There is a further complication if you make significant charitable donations under Gift Aid. The tax credit on your donation has to be funded out of the income tax and capital gains tax you pay. If you are considering making substantial donations under Gift Aid and you have substantial dividend income most tax years, it will be necessary to ensure you have paid sufficient income tax and capital gains tax otherwise you will receive a demand for the shortfall from HMRC.
iv) Interest
If you have lent money to your company, paying interest on your loan is another way to extract profit tax efficiently as no national insurance contributions will be payable on the interest which will be tax deductible against your company’s profits.
We hope you have found the suggestions above helpful. In our next article in this series, we will be looking at capital expenditure planning. As always, please contact us to discuss your circumstances with you.
These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.
