Maximising Profit Extraction Before the 2023/24 Tax Year Ends: What Are Your Options?

As the 2023/24 tax year draws to a close, personal, and family company operators should scrutinize the profits they’ve extracted thus far and consider if extracting additional profits could be advantageous before the year’s end. The goal is to maximise tax efficiency while navigating any relevant non-tax considerations. Here’s a breakdown of the options available:

  1. Salary and Bonuses

Paying up to the personal allowance limit of £12,570 is tax-efficient, avoiding employee National Insurance as this threshold aligns with the primary Class 1 National Insurance threshold for 2023/24. If the employment allowance applies, employer’s National Insurance could also be negated. However, companies with a sole employee who is also a director are ineligible for this allowance. Where the employment allowance doesn’t apply, employer’s National Insurance at 13.8% kicks in for amounts over £9,100. If you haven’t yet utilized this strategy, consider doing so before April 6, 2024.

  1. Dividends

Dividends are an option if there are sufficient retained profits. With the dividend allowance set at £1,000 for 2023/24 (dropping to £500 from April 6, 2024), it’s wise to distribute dividends before the year-end, especially if they fall within the tax-free allowance this tax year but would be taxed in 2024/25. Dividend payments must reflect shareholdings unless an alphabet share structure is in place.

  1. Pension Contributions

Company contributions to your pension scheme can be a tax-efficient extraction method. This is especially true if you have remaining annual allowance or unused allowances from the past three years. Contributions can be deducted from the company’s taxable profits, offering a strategic way to enhance your pension pot without immediate tax implications.

  1. Benefits in Kind

Extracting profits through tax-free benefits, such as those falling under the trivial benefits exemption, can also be advantageous. This exemption allows for providing benefits costing no more than £50 each, with a cap of £300 per tax year for company directors.

  1. Do Nothing

Sometimes, the best action is inaction. If extracting further profits would only lead to additional tax liabilities and the funds aren’t needed externally, keeping the profits within the company might be the wisest choice. This decision should also consider the company’s operational funding needs.

Each of these options offers a pathway to tax-efficient profit extraction, tailored to different financial situations and goals. A careful evaluation of these strategies, potentially with the guidance of a financial advisor, can help maximise the benefits of your company’s profits as the tax year concludes.

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Any questions?

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