If you have a personal or a family company, you’ll need to take money from your company to pay your personal bills. There are various ways of taking money from your business, one of which is the popular tax-efficient strategy of paying a small salary of £8,840 for 2021/22. This is to ensure that the year qualifies for state pension and contribution benefits. Any further income would be extracted from profits as dividends.

This works really well if there are sufficient retained profits in the business to allow for a dividend payment. Like many, if your business has been adversely affected by the COVID-19 pandemic, it may have used up any reserves the business had. Dividends must be paid from retained profits and, if there are none, it won’t be possible to pay a dividend.

But, what are the other options for extracting funds to meet the living expenses?

  1. TAKE A DIRECTOR’S LOAN

If you are expecting the company to return to profitability, taking a loan from the business can be an attractive option. Depending on the timing of the loan, a director can benefit from a loan of up to £10,000 for up to 21 months free of tax and National Insurance.  If within nine months of the year-end, the business has returned to profitability, a dividend can be declared to prevent a Section 455 tax charge from arising.

If the director’s loan account is overdrawn at the Corporation Tax due date nine months and one day after the year-end, a section 455 tax charge of 32.5% of the outstanding amount must be paid by the company. This will be repaid after the Corporation Tax due date for the accounting period in which the loan balance is cleared.

2. PAY ADDITIONAL SALARY OR BONUS

A salary or bonus can be paid even if this creates a loss. It doesn’t have to be paid from profits, unlike a dividend. Some considerations may need to be made once the salary exceeds the optimal level. A higher salary or bonus attracts higher income tax rates applicable to salary payments.

3. PROVIDE BENEFITS IN KIND

There are various tax exemptions that you may want to consider, such as trivial benefits and mobile phones. They provide certain benefits in kind in a tax-free fashion.

4. PUT PERSONAL BILLS THROUGH THE DIRECTOR’S LOAN ACCOUNT

If your company pays for the bills on your behalf, you can charge them to the director’s loan account. As mentioned earlier, if the company has enough profits to clear the balance within nine months of the year-end, there will be no Section 455 tax.  A benefit in kind tax charge (and a Class 1A National Insurance liability on the company) will arise if the outstanding balance is more than £10,000 at any point in the tax year.

5. PAY RENT

If you are the director of the business and you run your business from home, the company can pay you rent for the office space. You will pay tax on the rental income and the rent must be charged at a commercial rate. There is no National Insurance liability, and the rent can be deducted from the company’s profits, even if this creates a loss.

In circumstances where the extraction policy creates a loss, it may be possible to carry the loss back to previous years to generate a tax repayment.

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Any questions?

If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant