How To Take Money Out Of Your Business Tax Efficiently

14 November 2023

If you’ve worked for yourself for a while, your company may have begun to accumulate savings.

Instead of leaving your money to grow, most likely at under-inflation interest rates, it makes sense to look at how you can put your hard-earned cash to work.

The question is, how do you take it out of your company without incurring a high tax charge?

This was the subject of a recent webinar we hosted in collaboration with IPSE. Here’s a summary of the key take-outs.

#1 – Pay yourself tax efficiently

The first aspect to check is whether you’re paying yourself tax efficiently.

Most limited company contractors pay themselves a mixture of salary and dividends, taking the salary part as their tax-free allowance (currently £12,570, 2023/24) and the remainder of their income via dividends.

This is usually the most tax-efficient way to take a regular income from your business. Your company pays Corporation Tax on the profits it makes. It pays you dividends from the profits and you pay Dividend Tax on these. from which you can take £1,000 tax-free (an allowance that reduces to £500 in 2024/25).

It is interesting to note that if you want to take a higher level of dividend from year to year you can spread the tax bill. For example, if you expect to take £80,000 in dividends this year but want to take £120,000 next year, you can ‘vote’ dividends of £100,000 per year instead, giving you a relatively straight-forward tax saving.

Whilst the Corporation Tax and Dividend Tax rates have changed in recent years, they remain more favourable than taxation as an employee in the main.

#2 – Get your company to pay for allowable benefits

If you have money left over once you’ve paid yourself through salary and dividends, and you still have healthy reserves, you may want to look at other ways to put this money to work.

Pension

There are a number of options available, the most common (and most tax-efficient) is to invest in a personal pension. This is because your company can make employer contributions which are tax deductible ie. pension contributions are deducted from your profit calculation so are not included in your Corporation Tax bill.

You can pay up to £60,000 a year into your pension from your company before tax charges apply. When you reach retirement age, you can take 25% of your pension in a tax-free lump sum. You won’t pay tax on the growth in your pension but the remainder of your pension payments will be subject to income tax. Of course, the downside of a pension is that the money is locked away in the pension scheme, so if you don’t want to tie up your money in this way, you may want to look at other options.

Short-term loan

You can take a short-term loan from your business without facing tax implications. This loan must be short-term and any loan taken must be repaid in full within 9 months of the company yearend in which the loan was taken or there will be a 33.75% withholding tax charge (Section 455 Tax). . For loans of £10,000 or more, you will also need to pay interest back to your business to remove any benefit in kind charge. This can be helpful if you need to pay for something substantial like home repairs or a wedding, for example.

Buying property

You can also use your reserves to loan money to a second ‘associated’ company. We have a large number of clients who set up associated companies to buy rental property. The loans enable them to buy the property and then the property company gradually pays the money back. Whilst you’re not directly extracting the cash from your business, you are at least putting it to work investing in an asset which will hopefully grow in value over time, and give you an additional income stream.

You should be aware that an associated company may affect your Corporation Tax position. Even if the associated company doesn’t make a profit, the fact that it was trading may mean an overall increase in your Corporation Tax liability.

Investments

You can use your company reserves to invest in business savings accounts or business investment accounts. You can also invest in other businesses – any interest income you may receive would be subject to Dividend Tax.

Your business can lend money to you as an individual to invest but you would be subject to what is known as S455 tax which is currently 33.75% of the loan outstanding at the year-end.

Health insurance, life insurance

You may also use your reserves to buy other benefits. Private healthcare and some types of life insurance can be paid for by your limited company.

Company cars

Tax on petrol and diesel company cars has made it less appealing in recent years. On typical car (a VW Golf, for example) you have a Benefit in Kind tax charge of 30–37% of the purchase value to pay each year meaning you are taxed on nearly half the original price of the car every year at income tax rates.

A car which is fully electric, on the other hand, may be worth buying if you were looking to buy a car anyway. The cost of a fully electric car, even a second-hand one in some instances, is tax deductible. Your business can also pay for the road fund licence, maintenance and charging. The Benefit in Kind tax on full electric cars is 2% – this is likely to rise in coming years, but will still be lower than petrol/diesel company cars.

#3 – Think ahead to how you will close your company

Whether you’re near to retirement or it’s a good few years away, it’s worth considering the tax treatment of reserves in your business when you eventually close your business.

When you decide you no longer wish to work or to operate your limited company, you’ll need to take steps to formally close it down if you’re to enjoy tax efficient treatment of the income you’ve accumulated.

If you have more than £25,000 left in your business when you’re ready to close, you will need to appoint an insolvency practitioner and go through a process to claim Business Asset Disposal Relief (BADR) which has replaced Entrepreneur’s Relief. To be eligible you must meet certain conditions but, if you follow the procedure correctly, the reserves left in your business when you wind up would be subject to 10% Capital Gains Tax rather than the standard 20%.

If you wind up your company but then open another doing similar work in a similar sector, then you may come under the watch of HMRC. The tax authorities would usually look for a gap of at least 3 years if you wish to start a new but similar business.

In summary

If you’re accumulating reserves in your business, it’s well worth exploring how that money could be put to work. As we have shown, there are various options available which could be beneficial and tax-efficient, but you need to proceed with caution and operate within the rules which can be complex. We hope to have shown the importance of being financially aware of your options by working with a specialist contractor accountants so you can think long-term about the right steps to take and understand the tax implications.

Can we help?

Everyone’s circumstances are different and it’s important to take tailored advice regarding the use of your company reserves. Speak to a member of our expert team of accountants who specialise in the needs of freelancers and contractors.

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