Extract cash from your limited company in a tax-efficient way

Jan 09, 2021

Tony Byrne: Managing director of Wealth & Tax Management.

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I WAS recently discussing profit extraction from a limited company with a couple I know who run their own successful telecommunications company writes Tony Byrne, managing director of Wealth & Tax Management. They are both director shareholders.  

It is a high turnover business with low-profit margins. They work hard and only employ two more members of staff. They run the business from home. They are in their mid-40s.

They have an accountant who is competent enough to prepare annual accounts but his tax knowledge is fairly average so he is unable to advise them on their corporate or personal taxes.  

I suspect they engage him because he is cheap.

In some ways, I understand why they run a low-cost operation. In their minds, it is the only way to make a decent profit.  They estimate that they extract about £100,000 each from the company annually in the form of a small salary each and the rest in dividends.

Because they did not have a lot of money in savings they decided to reinvest about £140,000 into a portfolio of shares earlier this year. The problem is that once you take into account Corporation Tax and the personal taxation on the dividends, they estimate they lose about 50% of the profit extracted from the company in taxation.  

So in order to extract £140,000 from the company, approximately £140,000 is lost in taxation.

What’s more, the £140,000 was reinvested without using their ISA allowance of £20,000 each.  Neither did it occur to them or their accountant to pay employer contributions into their personal pensions instead.  They have accumulated just £82,000 in combined pensions so far.

I advised them to invest the £150,000 they have in a company bank deposit account into their combined pensions using the unused annual allowance from the previous three tax years and this year’s allowance.  

I explained that not only would this save them and the company paying approximately £150,000 in taxes, it would in fact save the company a further £28,500 (19% x £150,000) in Corporation Tax on the £150,000 pension contribution as well.  

This would result in the company and them personally having an additional £178,500 capital available (£150,000 + £28,500).  

Furthermore, the pension itself will be tax-sheltered until they decide to draw their benefits from it. Even then the first 25% will be tax-free. They agreed it made sense and asked us to act for them. I agreed.

Tony Byrne is a chartered and certified financial planner, a chartered wealth manager and author of Wealth Magic.

If you would like advice on how to extract money from your limited company tax efficiently, why not benefit from a one-hour Discovery Meeting either at our offices or by a video conference call at our expense worth £270 to each of the first three readers who contacts us before 31 January 2021? You know it makes sense.  We offer a great cup of coffee too.

Ring us on 01908 523740 or for free on 0800 980 4516 or email wealth@wealthandtax.co.uk.

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