With the introduction of various tax changes, notably the restriction on interest for unincorporated property businesses with residential lets, an increasing number of landlords are choosing to operate their property businesses through a company structure. Operating a property business in this way presents numerous advantages, such as lower corporation tax rates on profits compared to the income tax rates that unincorporated landlords face. Additionally, interest and finance costs related to residential lets are fully deductible when calculating the profits subject to corporation tax.
However, it’s crucial to acknowledge the potential downsides. For instance, the company doesn’t benefit from a personal allowance, meaning tax is applicable from the first pound of profit. Furthermore, landlords wishing to personally use the profits outside of the company may trigger additional tax and National Insurance liabilities.
Developing a Tax-Efficient Profit Extraction Strategy
For landlords who haven’t fully utilised their personal allowance, a popular and tax-efficient strategy involves taking a salary equal to the personal allowance amount, which for the 2023/24 tax year is set at £12,570. At this salary level, there is no employee National Insurance contribution required. Additionally, if the National Insurance employment allowance is applicable, the employer’s National Insurance is also waived. However, in scenarios where the allowance is not available, such as in a personal company where the landlord is the only director and employee, there will be a minimal employer’s National Insurance cost – specifically, £478.86 for a salary of £12,570 in the 2023/24 tax year. Choosing a salary between £6,396 and £12,570 also brings the added benefit of securing a qualifying year for state pension purposes without incurring contribution costs.
Once the personal allowance is fully utilised, extracting additional profits via dividends generally becomes the more tax-efficient option. It’s important that the company has ample retained profits to cover the proposed dividends, and for companies with multiple shareholders holding the same class of share, dividends must be distributed proportionally to shareholdings. This limitation can be bypassed through the implementation of an alphabet share structure. Every individual is entitled to a £1,000 dividend allowance for the 2023/24 tax year, and dividends that fall within this allowance are tax-free, though they do contribute to band earnings. Beyond the allowance and any remaining personal allowance, dividends are taxed at 8.75% within the basic rate band, 33.75% within the higher rate band, and 39.35% within the additional rate band.
Another consideration for the company is the option to make pension contributions on behalf of the landlord. These contributions are deductible when calculating the company’s taxable profits, presenting another avenue for tax-efficient profit extraction.
Navigating the complexities of profit extraction from a property company requires a strategic approach to optimise tax efficiency. By balancing salary, dividends, and pension contributions, landlords can effectively manage their tax liabilities while ensuring they are making the most out of their property investments. Consulting with a tax professional is recommended to tailor these strategies to individual circumstances and ensure compliance with current tax regulations.
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