Taking the profits

[John E]

Can anyone offer me some advice on how I ought to go about extracting profits from a limited company?

My situation is as follows...

My wife and I run and own a consultancy business, which we registered as a limited company in March 2004. During FY04/05 the business has generated a six-figure profit and, not having paid ourselves a penny in salary since starting up, we'd now like to extract some income for ourselves.

Our plan is to pay directors fees equal to £4,745 each and separately to pay dividends totalling £31,400 per person (we own the firm 50:50 and it is a genuinely joint effort to run it), all before the end of the current tax year. We think it makes sense to go up to the higher rate limit as we both envisage being higher rate taxpayers for some years to come, especially if we were to move on to work for someone else.

I just wonder, though, if we are missing something obvious. Our objective is to minimise the amount of tax that we pay over a fairly long horizon (i.e. cash-flow this year isn't the number one priority), but are we going about this the right way?

Any advice would be greatly appreciated!

 

[Alpha]

To a degree yes but


The dividends should be declared, minuted and paid to each individual. Dividend vouchers should be produced and kept as a record that the dividends have been received by each individual.

How have you been living throughout the year? If you have been withdrawing money and crediting to a directors loan account that will need to be cleared by regular quarterly dividends otherwise you could technically be over the £5k allowable tax free loan amount and be required to fill in a P11d and pay interest on the amount over the allowable figure.

Obviously a P35 should be completed to ensure that NI contributions records are maintained

 

[John E]

Thanks Alan.

We've been living on savings for the last year and have taken no money from the company whatsoever except for travel/hospitality/telephone expenses (that we now have a dispensation for).

We have a directors' meeting tomorrow at which both the salary and dividend payments will be agreed and minuted as you suggest. We'll also issue vouchers.

 

[james constant FCCA]

Hi
I would suggest the following for you to achieve your tax - savings objective:

Spread the shares ownership to other family members on low income or make them employees.

Directors to borrow short term up to a certain limit and replace the funds before the date specified by the law so as to avoid paying any personal or corporate taxes on those loans.

Consider what the most tax efficient method for dealing with business traveling is (eg company cars Vs cars owned personally etc).

And so on. The list of available tax savings opportunities can be endless, depending on each business' particular circumsatnces of course. There is no such a thing as a catch-all tax solution.

I hope this helps as general guidance but nothing can substitute for proper professional advice to get it right from the outset as tax planning errors can be very costly and not easily reversible . That is more relevant in your case as your business is fast growing .

James Constant FCCA
Chartered Certified Accountant
http://www.taxadviceuk.com
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