There are many benefits to running a property business through a limited company rather than as a sole trader. Corporation Tax is charged at 19% which is lower than the basic rate of income tax, and interest and financing costs are fully deductible when calculating taxable profits.
However, there are some considerations when it comes to extracting money from the business. These may incur a further tax cost.
SHOULD I TAKE A SALARY?
Many individuals set up a property business alongside another role. If you are not using your personal allowance for other income, it may be tax efficient to take a small salary from the property business.
Running a small salary from the business, which is at least equal to the lower-earning limit of £6,240 for 2021/22, will ensure that the year is classed as a qualifying year for state pension and National Insurance.
Each circumstance is different, and the optimal salary depends on whether the Employment Allowance is available. The employment allowance will allow some shelter from Employer’s National Insurance. If a company only has one employee and they are also a director, the Employment Allowance will not be available. This means the optimal salary would be equal to the primary threshold of £9,568. Where the Employment Allowance is available, it is tax efficient to pay yourself a higher salary which is equal to that of the personal tax allowance of £12,570 in 2021/22.
SHOULD I DECLARE A DIVIDEND?
A popular and tax-efficient method to extracting profits from your business would be to take them out as dividends. If you have any unused personal tax allowance, the dividends will be tax-free. You also have a dividend allowance set at £2,000 for 2021/22 for each shareholder.
Once you’ve used your personal allowance and your tax-free dividend allowance, the remaining dividends will be taxed at:
- 7.5% for basic rate
- 32.5% for higher rate
- 38.1% for additional rate bands
HMRC state that dividends can only be paid from of retained profits (profits once Corporation Tax has been paid) and they must be paid in accordance to the shareholdings. There is some flexibility on this when using an alphabet share structure.
WHAT ARE MY OTHER OPTIONS?
There are some alternative ways to extract profits from your property company. These can be done by using benefits in kind. This can be beneficial if the benefit is exempt from tax and National Insurance, the payment of rent if you run the business from home or if you’re making pension contributions on the director’s behalf.
This is a complex topic and it depends on your circumstances. If you need more help, contact an expert to discuss.
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