When extracting profits from a family company, there are multiple options available. Each method has its own tax implications, so it’s essential to choose the most efficient one based on your personal and business circumstances. Below are some of the most common methods:
1. Salary
- Pros: Salaries are an allowable business expense, reducing the company’s taxable profits.
- Cons: Salaries are subject to income tax and National Insurance contributions (NICs) both for the director and the company. The company must also pay employer NICs on salary payments.
2. Dividends
- Pros: Dividends are generally more tax-efficient than salaries because they are not subject to NICs and are taxed at a lower rate.
- Cons: The company must have enough distributable profits to pay dividends. Dividends cannot be paid from capital or reserves. They are also only paid to shareholders, so if there are multiple family members with different shareholdings, the distribution may not be equal.
3. Director’s Loan
- Pros: If the company lends money to the director, it can be an interest-free loan. This method can be used for short-term funding.
- Cons: If the loan is not repaid within 9 months of the company’s year-end, it could be subject to additional tax charges. Interest may also be deemed if the loan is not repaid at market rates.
4. Pensions
- Pros: Contributions to a director’s pension are tax-deductible for the company and can help reduce its tax liability. Pension contributions are not subject to NICs or income tax.
- Cons: Pension funds are long-term savings, and the funds cannot be accessed until the director reaches retirement age.
5. Benefits in Kind
- Pros: Certain benefits, like a company car or health insurance, are not subject to income tax on the director’s salary.
- Cons: These benefits are subject to tax as a “benefit in kind” (BIK) and must be declared on the director’s personal tax return. The company may also face additional tax on certain benefits.
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