Withdrawing capital from your business tax efficiently

If you own your own business, you have to pay tax on any profit the business makes and on any income you take out of the company. It is essential to take advice on the most tax efficient way to withdraw capital from your business.

How much tax is due?

As a business owner, you have to pay tax on profits and personal tax on earnings. You can maximise your post-tax earnings by paying yourself a low salary under the income tax threshold and then topping it up with dividends from company profits. Dividends are how companies distribute profits to shareholders and, as long as the company is in profit, it can declare a dividend at any time. Tax treatment varies according to individual circumstance and is subject to change.

Profit is calculated by deducting any business expenses such as salaries, insurance, accountancy bills and travel costs, from the income. Corporation tax of 20% is then deducted from profits and the balance can be distributed as a dividend to the company’s shareholders. This will usually be the business owner and their spouse. The FCA does not regulate tax planning.

Accountancy and financial planning working together

Not only are there many different tax rates that affect both people and businesses, but they are complicated and always changing. Additionally your finances could be affected by the shifting of tax bands and allowances. Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate taxation advice, so Unividual is not authorised to advise on tax – this is what accountants do. However, what we do is ensure that you do not pay any more tax than you should. Therefore, it’s essential to have a good financial planner and accountant working together to achieve what you need. There are various options for reducing your UK tax burden and Unividual’s skill lies in knowing when and how to use various allowances and UK government backed schemes to ensure you maximise your earnings. Accountancy services are available by referral only.

Salary versus dividend

Even after the dividend hikes implemented in 2016, withdrawing capital through dividends is still more tax-efficient than paying yourself a bigger salary because dividends are not subject to either employer or employee National Insurance contributions. If your spouse is a shareholder too, you can make full use of the spouse’s tax allowance by splitting the basic salary and the dividend income, which will limit tax liabilities and maximise net income. It sounds complicated but if you work alongside Unividual we can help you with all this, also examining other areas for tax efficiencies, such as investments.

The value of investments can fall as well as rise, you may get back less than you invested.

False economy

If you don’t get financial advice, you might save some money at the start but it will lead to greater expenditure later on down the road. Tax rules are complicated and trying to do everything yourself can be a false economy. Unividual is well versed in working alongside accountants and solicitors so that business owners can generate the greatest return on their hard work. Together, you can focus on what you’re good at – running your business – and we can focus on your financial future.

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