Planning your profit extraction strategy:

When planning how to extract profits from your company as tax efficiently as possible, the best place to start is estimating what your profits are likely to be. This has been made difficult by category M in recent times, but a range of profits is fine as a starting point.

There is a number of methods of profit extraction, including:

• salary and bonuses

• dividends

• interest on shareholder loans

• personal pension contributions

• rents on shareholder properties.

In practice, any strategy is likely to involve a combination of these, depending on your circumstances.

Many of you will be taking a mixture of salary and dividends from your companies and in many situations this works, depending on the level of profits generated. Notwithstanding this, there are two main pitfalls:

• Dividend payments are restricted to the level of profits available within a company and this, in many cases, will not be known until the final accounts are drawn up.

• If you have ‘sleeping partners’ within the business (those who

do not play an active role, for example if their input is capital only), you may not want them to benefit from a dividend that is effectively an element of your earnings.

For those generating profits of more than £300,000 (this figure could be less depending on how many companies are under your control) it may be beneficial to pay out a greater level of salaries. Again, this comes back to the first point of having a rough idea of profits. Future reductions in the main rate of corporation tax, announced in the Budget last week, will impact on this particular profit extraction strategy.

With a 50 per cent rate of income tax now in force, it is worth revisiting your profit extraction strategy to ensure it is still beneficial. If your taxable income is greater than £100,000, such a review is essential.

Richard Baker is a partner at accountancy firm Horwath Clark Whitehill

Key points

• To plan how to extract profit from your business, start by estimating what those profits will be.

• There are several methods of profit extraction and your strategy is likely to be a mixture of these.

• Now is a good time to revisit your profit extraction strategy to take into account the 50 per cent income tax rate and other changes that were announced in the June Budget.

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