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Extracting profits from a small, limited company

1 July 2024

Small company directors typically take a small salary and dividends as remuneration. They also have options to extract profits through interest on loans, asset rentals, and accumulated reserves. Revisiting profit extraction strategies and exit planning is advisable.

Shareholders, usually directors, of small companies universally accept the practice of taking their remuneration as a small salary. They pitch this salary high enough to secure NIC benefits but not so high that it incurs employee NIC contributions. They take any balance as dividends.

Directors should set their salary plus dividends at a level that does not exceed the current basic rate Income Tax band (set at £50,270 for 2024-25), unless they need remuneration in excess of this.

However, director/shareholders have other methods to extract profits from their company. These include:

  • Directors can receive interest if they have credit balances on loans they made to their companies. In some cases, the Personal Savings Allowance will cover this interest.
  • If directors have loaned assets to the company, they may have the option to charge the company rent for the use of these assets. They should be free of any tax payment for isolated rentals up to a maximum £1,000 a tax year.

Directors also have the option to leave accumulated profits and cash balances inside their companies and build these reserves as rainy day funds. They can take dividends from accumulated reserves (after paying corporation tax) even if the company has ceased trading.

If you want to revisit your current strategy for extracting profits, or your longer-term exit planning from your business, please call us so we can discuss your options.

Source: Other Mon, 01 Jul 2024 00:00:00 +0100

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