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6 Ways to Extract Cash from your Company Tax-Efficiently

6 Ways to Extract Cash from your Company Tax-Efficiently

Introduction

There are various methods to extract cash from a company depending on your individual circumstances, and there are pros and cons to each method. Here, we run through some of the most common methods which can be used to extract cash from your company and explain how to do this tax-efficiently.

Often, you can involve family members (spouses, children, other family members) too, as long as they have some involvement in the running of the business to ensure that all of their allowances are being utilised. This is often a great way to maximise tax-efficiency.

Remember, this advice is general advice only – and as with all things tax, there are many considerations so you should get in contact with one of the team if you wish to discuss your individual circumstances. The general nature of the advice below applies to the 2022/23 tax year only as rates and allowances may change in subsequent tax years.

1. Taking a salary through the payroll

One of the most common methods of extracting cash from a company is by operating a payroll scheme and paying yourself a salary. This is usually called a “directors’ salary”.

For most directors, the optimum salary to take for the 2022/23 tax year is £11,908 per year (£992 per month). This is the amount that can be paid before you incur National Insurance in your personal name, which is 13.25%. The company will incur a small employers National Insurance liability at this amount, however, this will be more than offset by corporation tax savings.

Assuming you have no other income, you will not pay any tax in your personal name on this, but the company will get tax relief at 19% on any salary payments made to you, so the cost to the company is only £9,645 for you to receive £11,908.

If you have other taxable income above your £12,570 personal allowance, you will have some tax to pay in your personal name. If you are a basic rate taxpayer (generally income less than £50,270 per annum), then you will pay 20% tax on your income above your personal allowance. If you are a higher rate or additional rate taxpayer, then you will pay tax at 40%/45%.

Therefore, for basic rate taxpayers, it usually makes sense for you to take a director’s salary even though you will be paying tax at 20%. This is because the company obtains tax relief of 19%, so the net cost of extracting this cash is only 1%.

Another benefit of paying this amount of salary is that although you are not making National Insurance contributions, you get a credit on your account as if you had paid National Insurance, which will help ensure you receive the maximum state pension allowance when you are eligible.

It is worth noting that the salary payments do not have to be drawn and can instead be added to your directors’ loan account to be drawn at a later date.

2. Declaring dividends

The next most common way of extracting cash from your company is by declaring dividends. Dividends are a distribution of profit in the company. That means you must have sufficient profit in your company to be able to declare a dividend. If your company has losses – no dividend can be declared, and this option will not be available to you.

The benefit of declaring dividends is that they are taxed at a lower rate than other income (salary, interest, etc). They are taxed at 8.75% at the basic rate, 33.75% at the higher rate and 39.35% at additional rate compared to a director’s salary which is taxed at 20%/40%/45%. There is also no National Insurance on dividends.

An individual can receive dividends of up to £2,000 each tax year tax-free – so we always recommend to our clients to take at least £2,000 as a dividend where profits are available.

It is worth noting that the company does not receive corporation tax relief on dividends, so dividends are paid from post-tax profits – however they are generally still more tax-efficient than taking an additional salary.

Often, a director will take a director’s salary up to £11,908 and declare a dividend on any amounts above this. A director could take around £38k as a dividend on top of the directors which will be taxed at 8.75% which is a very tax-efficient way of extracting cash from a company.

Dividend vouchers will need to be prepared to declare a dividend, which we can prepare for you as part of our Company Secretarial services. If you receive dividends, you will also have to file a self-assessment tax return, which again we can prepare for you.

One drawback to dividends is that they have to be given to all shareholders who own the same class of shares equally, so there is a bit less flexibility. This makes it difficult if you have one shareholder who wants to take a dividend and one who doesn’t but they own the same class of shares. This can be mitigated by using an alphabet share structure (more on this in a future blog).

3. Withdrawing cash from your Directors’ Loan Account (DLA)

Often, a director will have deposited funds into the company or transferred properties or other assets into the company to start their business. In this instance, the director has effectively loaned the company money which they can draw from the company with no tax consequences.

If you have a DLA balance where the company owes you money, you can extract this cash back from your company with no tax consequences, provided you have the necessary cash funds available.

This makes it the most tax-efficient way to extract cash, however once your directors’ loan account is back to £Nil, any further withdrawals will have negative tax consequences, as covered in our previous article on DLA’s here.

4. Charging interest to your company on your Directors’ Loan Account

If you have a sufficient balance in your DLA, you can charge interest to your company which can then be paid to you.

The main benefit of charging interest to your company is to take advantage of the tax-free interest allowance. If you are a basic rate taxpayer, you are entitled to earn £1,000 of interest tax-free. If you are a higher rate taxpayer, the tax-free allowance reduces to £500.

The company will obtain 19% tax relief on all interest paid. You will only pay tax on any interest income earned above the tax-free amounts. Your tax rate on interest income will depend on which tax band you fall into and this could be taxed at 20%/40%/45%.

If your total taxable income is around £18k or below, you can receive an additional tax-free interest allowance of £5,000 which means you can earn up to £6k of interest income and not pay any tax in your personal name, whilst the company still gets tax relief at 19%.

Another benefit of charging interest to your company is that there is no National Insurance payable on interest income. If you are unable to take a dividend, but need to extract more cash than the £11,908 directors salary and want to preserve your DLA balance, you could charge the company interest and pay tax at 20%, but receive tax relief in the company at 19%.

Any interest charged to your company should be at a commercial rate for other unsecured loans, which could be in the range of 5% to 15% depending on the risk involved.

There are some additional compliance obligations for companies when they pay interest to individuals including directors. The company will need to complete a form CT61 and file this with HMRC. In addition to completing form CT61, the company will have to deduct 20% tax on any interest payments and issue a tax deduction certificate to the individual. The tax deducted will need to be paid to HMRC by the company and the individual/director will then declare the income and the tax deducted on their annual self-assessment tax return.

5. Charging rent to your company

This is less common, but if you own a premises in your personal name that your company operates from, you can charge your company rent.

The tax treatment is similar to interst charges, meaning the company will receive tax-relief at 19% and you will pay income tax at 20%/40%/45%. Again, there is no National Insurance on rent.

This can be used for office buildings or other commercial buildings. It is not recommended to be used for residential buildings that you are also living in, as there will be negative tax consequences for you personally.

Please get in touch with one of the team if you wish to consider this as there are a number of tax relief’s that this could impact down the line if this is implemented, so careful consideration is needed.

6. Claiming expenses and other benefits

This is probably the least valuable in terms of the amount of cash you can extract, but is one of the most important due to the tax treatment of it. The expenses that we discuss below can usually be claimed as a company cost, attracting tax relief at 19% but there is no tax charged on you personally.

Some common expenses to claim are as follows;

  • Mobile phone costs (ensure the contract is in the company name)
  • Laptop/Computer
  • Mileage (keep a log)
  • Use of home (£6 per week)
  • Make use of the trivial benefits allowances, more on that here
  • Make use of the annual events exemption – more on that here

Please look out for our comprehensive expenses guide which will be released soon.

Conclusion

There are many ways to extract cash from your limited company, however your individual circumstance will need to be reviewed to work out the most tax efficient for your circumstances.

Please get in touch with us if you’d like us to review your circumstances and help you extract cash from your limited company in the most tax-efficient way.

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