Tax Advice

Keeping your cash in your pocket. How to extract cash from your business.

04 Sep 2017

At Accounts & Legal we always work with our clients to ensure that cash is extracted from their business in as an efficient manner as possible. The Chancellor of the Exchequer announced that from the 6th April 2017 several new changes that will have an effect on how business owners withdraw money from their businesses.

Personal allowance changes in the 2017-18 tax year

The personal allowance has increased this year to £11.5k – up from £11k last year – meaning that you can take home up to £11.5k tax free in 2017-18 tax year. For any earnings over £11.5k and under £45k you will be taxed at 20% and anything over £45k the tax rate will be 40%. There are further tax bands but for simplicity we will keep things simple for now.

Tax on dividends

For the 2017-18 tax year there have been major changes to the treatment of dividend income with the dividend tax credit system replaced by a flat rate scheme.

Dividends will now be subject to tax bands with the first £5k tax free and anything over £5k treated in the following way.

Firstly, any unused personal allowance may be used up tax free – e.g. if you received no salary you could receive dividends of £16.5k (£11.5k + £5k) tax free.

Secondly, the basic tax band of up to £45k will be taxed at 7.5%

Finally, dividends above the basic tax band will be taxed at 32.5%. Again, there are further tax bands but for simplicity we’ll leave it here. 

How to put this into practice

Firstly, we typically recommend taking a low salary of the personal allowance. This allows you to receive your NI stamp and maximise your tax-free element.

Any additional amounts over and above the personal allowance threshold should be extracted as dividends allowing you to utilise the tax free dividends allowance and move onto the lower tax rate bands that dividend income attracts.

Let’s take an example: let’s assume that you would like to extract income of £40k from your business and pay a minimal amount of income tax. You record a salary of £11.5k and take the remaining £28.5k as dividends. Of that £28.5k, £5k are tax free leaving £23.5k which will be taxed at the basic dividend tax rate of 7.5%, leaving a tax liability of £1.76k or an effective tax rate of 4.4% on income in the year. Leaving you with £38.24k cash in hand at the end of the year, significantly better off than if you had taken the income as a salary. 

If you would like to know what is most tax efficient way to withdraw money from your company, get in touch with one of our team of accountants who can support you in structuring your business to work for you.  
  

 

Chris Conway

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Managing Director, Accountant & Corporate Finance Specialist

0207 043 4000

About the author

Chris joined Accounts and Legal as Managing Director in November 2015. Chris’s primary role is ensuring the firm runs smoothly on a daily basis, supporting the growth of its entrepreneurial clients and delivering the firm’s own ambitious growth objectives. 

Having qualified as a Chartered Accountant (ICAEW) in general practice with a Top 20 firm in 2010, Chris quickly chose to specialise in corporate finance. During his 5 years Chris worked on over 70 transactions involving SME’s, from company valuations and restructures to substantial equity and debt fundraisings. He also advised on the sale and purchases of businesses, both to trade buyers and financial investors, providing advisory and due diligence services.

  

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