This alert is a reminder that a new tax year has started, and it may be prudent to review the way you extract funds from your company in the tax year 2021-22. We could consider the following:
Salary
We should revisit the amount you take each month as a salary. There are still compelling reasons to keep salary levels at an amount that counts as a qualifying year for State Pension and other State Benefits.
Dividends
As long as the dividends you take during 2021-22 (including all other taxable income) do not push you into the higher rate income tax band, dividends you receive from your company – in excess of the £2,000 tax-free amount – will be taxed at 7.5%. If the higher rate band is exceeded this additional tax charge increases to 32.5% on dividends that form part of the higher rate tax band. We should estimate your income from all sources and set your dividend policy at an amount that avoids this higher 32.5% tax charge or keeps it to a minimum.
Rent
If you run your company from home, you can consider renting your home office to the company. The rent, which should be at a commercial rate, is deductible in computing the company’s taxable profits. However, you must pay income tax on rents received in this way and declare them on your self-assessment tax return. On the plus side, there is no National Insurance to pay.
Benefits in kind
There are a number of tax exemptions for benefits in kind, such as those for mobile phones and trivial benefits, which enable you to extract profits without an associated tax or National Insurance liability.
Pension Contributions
You can also extract profits in the form of pension contributions as your company can pay contributions into a pension plan for you (as long as your available annual allowance has not been used up).
Directors’ loans
If your need money for a short time, taking a director’s loan can be tax efficient. You can borrow up to £10,000 for up to 21 months tax-free. However, there are tax consequences if the balance exceeds £10,000 at any point in the tax year or if you do not repay the loan within nine months and one day of the end of your accounting period.
Interest on loans to your company
If you lend money to your company, there is no reason why you should not charge interest. Interest would not be subject to National Insurance deductions and may be covered by an annual savings allowance. In which case no income tax charge would arise.
Retaining profits in your company
Extracting profits from your company may trigger a further tax and National Insurance charge. If you do not need the profits for personal use, consider leaving them in the company to extract later when this can be done more tax efficiently.