Taking Account

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  • Taking Account

Extracting profit from your company 2010-11

May 2010

Owner directors of small limited companies can withdraw profits in two basic ways – as a salary or as a dividend.

In general terms it is usually more beneficial from a tax point of view to take a dividend; dividends can be paid with no National Insurance charge.

There are disadvantages to this policy, for instance dividends do not count as earnings when qualifying pension contributions for tax relief.

National Minimum Wage considerations: Unusually directors are not subject to the National Minimum Wage rules, so it is perfectly legal to remunerate directors at hourly rates below the normal legal limits. However please note that employment of a director’s spouse, when they are not a director or other officer of the company is affected by National Minimum Wage. A record of hours worked and wages paid is advisable.

State Benefits: The benefit of basic state pension and a modest earnings related amount (calculated at pay of £14,100) is available at pay equal to the earnings threshold, so there is no benefit to the earner in increasing the pay until the £14,100 limit is exceeded. At salary of £20,000 slightly more earnings related pension would be available but at significant extra NIC cost.

Sharing dividends with your spouse: It is possible to reduce tax liabilities on profits extracted by paying dividends to a spouse with lower marginal rates of tax. To ensure that the distributions benefit from the decision in a recent tax case, that established that the spousal exemption prevented additional tax charges arising on the working spouse, the company should be set up with ordinary shares with full rights for both spouses. And preferably the working spouse should gift shares to the non working spouse so that the “settlement” arises from an outright gift of property.

This is only available to couples who are either married or in a Civil Partnership.

In summary – there may be more to report on this issue next month when we see the details of the first coalition Budget!

Hilton Sharp & Clarke