Changes to the rates and allowances impact on directors of personal and family companies looking to extract profits in a tax-efficient manner. As always, the optimal strategy will depend on circumstance, and professional advice should be sought.
It is generally beneficial to take a small salary, particularly where the recipient does not have the 35 qualifying years needed for the full single-tier state pension. Where the employment allowance is not available (as is the case for a company with a single employee who is also a director, or where it is utilised elsewhere), the optimal salary for 2019/20 is one equal to the primary threshold for Class 1 National Insurance purposes, which for 2019/20 is set at £8,632 (equivalent to £166 per week and £719 per month).
If the employment allowance is available, for example in a family company with a number of employees, the optimal salary is one equal to the personal allowance of £12,500, assuming it is available and not used elsewhere.
Above these limits, it will generally be more beneficial to extract further profits as dividends, making use of shareholders’ dividend allowances and basic rate bands, where possible.
Before extracting profits from your company, discuss your optimal profit extraction strategy with our professional adviser at Shipleys Tax.
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