Running a business requires hard work and dedication, so it’s important to reap the financial rewards of your endeavours. Here we consider how to extract profit in a tax-efficient manner.
Have you considered a dividend over a salary or a bonus?
Some may choose to take a dividend over a salary or bonus. Dividends are paid from the profits available after Corporation Tax is paid. A salary or a bonus generally creates tax charges for the company, carrying up to 25.8% in combined employer and employee national insurance contributions (NICs). Dividends, however, are paid free of NICs.
The Dividend Allowance (DA) currently sits at £2,000 per year. The DA charges £2,000 of the dividend income at 0% tax: this is called the dividend nil-rate. The rates of tax on dividend income above the allowance are 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers.
In September 2021 the government announced an increase to the rates of tax paid on dividends by 1.25% from 6 April 2022 to help fund the new planned investment in health and social care. The new rates will therefore be 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
Other ideas for profit extraction
There are a handful of alternative profit extraction ideas for individuals to consider. These include:
- making pension contributions – employer pension contributions often prove to be very tax-efficient when it comes to extracting profit from a company
- taking incorporation into account – self-employed individuals or those with partner status may want to consider incorporating. This may provide more scope for saving or deferring tax
- utilising tax-free allowances such as mileage payments, which apply when you drive your own car or van on business journeys
- making the most of property – you are entitled to receive rent up to the market value on property that is owned by you and used for business purposes.
However, there may be other tax implications to consider, so care needs to be taken. Please be sure to talk to us before acting.
Capital allowances
The majority of businesses are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure on most types of plant and machinery (except cars). The AIA applies to businesses of any size and most business structures, but there are provisions to prevent multiple claims.
The AIA will remain at £1,000,000 until 1 April 2023, when it reduces to £200,000 for expenditure incurred after this date. Complex calculations may apply to accounting periods which straddle this date. It is therefore important to time the purchase of plant and machinery carefully in order to make the most of the allowances available in light of the decrease.
Expenditure not covered by the AIA enters either the main rate pool or special rate pool, attracting writing down allowance (WDA) at a rate of 18% or 6% respectively. The special rate 6% pool includes cars with CO2 emissions exceeding 50 g/km, long life assets and certain specified integral features of buildings.
Typically, a purchase made just before the end of the current accounting year will mean the allowances will usually be available a year earlier than if the purchase was made just after the year end. In the same way, the disposal of an asset may trigger an earlier claim for relief or even an additional charge to tax.
In addition, a capital allowances regime has been introduced for structures and buildings. The Structures and Buildings Allowance applies to non-residential structures and buildings. Relief is available on eligible construction costs, at an annual rate of 3% on a straight-line basis.
Between 1 April 2021 and 31 March 2023, companies investing in qualifying new plant and machinery may benefit from a new first year allowance (FYA). A company will be allowed to claim a super-deduction of 130% on certain new plant and machinery investments that ordinarily qualify for the 18% WDA and a special rate (SR) FYA of 50% on most new plant and machinery investments that ordinarily qualify for the 6% WDA.
Contact us for advice on how to optimise capital allowances for your business.
Considering the company car
Company cars are often seen as an attractive perk – however, they are not always the most tax-efficient option.
If you have a company car, it is considered a benefit-in-kind, and you have to pay Income Tax on the car benefit and car fuel benefit, assuming you are provided with fuel by your employer for private journeys.
The car benefit is calculated by using the car’s list price, multiplied by a percentage based on the car’s carbon dioxide (CO2) emissions. Similarly, the car fuel benefit is calculated using the same percentage but on a notional £24,600 for 2021/22. Additionally, employers will also have to pay Class 1A National Insurance Contributions (NICs) at 13.8% on these benefits.
The appropriate percentages within the bands of CO2 emissions (and therefore the taxable benefits) have increased significantly over recent years. In the light of these trends, it would be advisable to review your company car policy.
There are a range of bands with appropriate percentages ranging from 1%-19% for low emission vehicles emitting less than 75g/km of CO2. Cars with emissions above this will have their percentage rate set at 20% plus 1% for every 5g/km increase, up to a maximum of 37%.
Additionally, to accelerate the shift to zero emission cars, all zero emission models are subject to a 1% rate. This increases to 2% from 6 April 2022.
From 6 April 2022 Class 1A NICs payable on company car benefits will increase by 1.25%, making the employer's contribution 15.05%. This temporary increase will be replaced by the Health and Social Care Levy of 1.25% for contributions after 6 April 2023. In view of these increases, you may wish to undertake a review of your company car policy.
It may prove more financially sound to pay employees for business mileage in their own vehicles at the statutory mileage rates, especially if their business mileage is high. In some cases, a company van might also be appropriate. The taxable benefit for the unrestricted use of company vans is £3,500 in 2021/22, plus a further £669 of taxable benefit if fuel is provided by the employer for private travel.
We can review your business motoring requirements to help keep your tax and NIC liability to a minimum.
