It is perhaps one of the commonest questions I get asked by owners of OMBs – how can I take money out of my business tax efficiently?
Clearly this question is only raised with me by individuals who are running their business activities through a company.
One very important, and often overlooked, issue is the fact that there is a clear distinction between corporate and personal money. It is unfortunately a common situation that many a business man/woman has got into problems by not appreciating the distinction and in particular the fact that tax is nearly always relevant when extracting company funds.
The current taxation regime is such that extracting profits from a company by way of dividends, rather than salary/bonus, is the most tax advantageous route when looking at the total tax take. It is for this reason that many businesses are set up as companies to enable this planning to be exploited. This is why the owners of many OMBs are typically paying themselves a modest salary topping that up with the payment of dividends on a regular basis.
The changes to the tax treatment of dividends announced in the Summer Budget have attempted to deal with this issue. However, the planning is still sound albeit the tax saving will be eroded from April 2016. The owners of OMB companies will need to be alive to this change and the message it may be sending that the planning opportunity is in the Government’s sights such that the ‘advantage’ may be further eroded over time.
Profit extraction remains a recurrent theme for OMB companies. If profits/cash do not need to be retained in the business and are required for personal use a company is perhaps not the best structure. Alternatively, if cash is not an immediate requirement for the business owner a company can be a useful way by which tax liabilities can be managed.
Friend Partnership is a forward-thinking firm of Chartered Accountants, Business Advisers, Corporate Finance and Tax Specialists, based In The UK
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