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Coronavirus Advice  •  Corporate Taxation  •  Personal tax  •  Small Business  •  Tax Planning

Tax efficient remuneration ideas during a pandemic

By RJP LLP on 25 November 2020

As a result of the COVID-19 pandemic, your company’s business may be running at a loss or facing reduced profit levels this financial year. If you, like other company director shareholders, rely on being able to extract a salary and dividends from your company, this might be less feasible right now. This article explains the different options for extracting money from your company.

What remuneration strategies exist?

Limited companies pay corporation tax on their profits and if the net profits are to be paid to shareholders or directors of the company, they can be extracted, usually as salary or dividends with tax payable based on the individual’s income levels. Extracted funds may be liable to income tax and both employee’s and employers’ national insurance contributions.

For the financial year from 1 April 2020 to 31 March 2021 corporation tax is payable at the rate of 19% and this rate will also be applicable in the 2021 to 2022 financial year. Having already paid corporation tax on profits made by the company, additional tax may be payable as above, depending on how the cash is extracted.

Here are the different remuneration options available:

Take a salary or bonus

A salary or bonus is treated as a tax-deductible expense incurred by the company and will reduce the taxable profits to be declared. This can be a good strategy when funds are needed for personal living expenses and there are insufficient profits available for the company to pay a dividend. The amount paid out as a salary or bonus becomes taxable once the personal allowance of £12,500 has been used up and at this level it will also attract employee’s NICs together with employers’ Class 1 NICs of 13.8%. You may alternatively prefer to draw a salary that meets the higher earnings limit (HEL) threshold for not paying NICs; in the 2020/21 tax year, this is £9,500. The rate of income tax payable depends on the level of salary; the higher rate income tax threshold is currently £50,000.

Benefits in kind

All benefits in kind are also deductible from company profits in arriving at profits chargeable to corporation tax. Many benefits e.g. company car, private health cover, gym membership, are taxable on the individual on form P11D and the company will also have to pay Class 1A employers’ NICs on the value of the benefit. Other types of benefits like mobile phones where the contract is in the name of the company, do not attract any additional tax.

Although it will not represent a large amount of money, given that benefits are deducted from gross profits, they are useful to consider. It is advisable to create a broad package of tax efficient benefits for this route to be as effective as possible.

Taking a company loan

It is possible to take out a repayable loan from your company and up to a limit of £10,000, it will not give rise to a personal tax liability.  This can be a useful strategy if emergency funds are needed in the short term. However loans to shareholders will attract a tax charge for the company if they remain outstanding 9 months after the end of the accounting period in which they were made.

Currently, it is also possible to apply for a £50,000 emergency Bounce Back Loan from the government scheme, which is repayable with very favourable terms. Find out more about getting a Bounce Back Loan.

Other loans are generally not advisable without taking specialist advice because HMRC can regard larger, more long-term company loans as artificial arrangements designed to avoid tax.

Claim tax relief for losses

If the company is currently making a loss, no corporation tax will be payable. If a profit was made in the previous accounting year, the current year’s loss can be carried back to claim a repayment of corporation tax previously paid. It is usually necessary to wait until the accounts of the loss making year are available in order to make the claim,  but in the current climate, HMRC have agreed this can be claimed mid-year rather than waiting until the company’s accounts are prepared. This can provide a repayment of corporation tax paid in the previous year and a useful early injection of cash for the company.

Taking a dividend

Dividends are a popular way for director shareholders to extract funds from a company and they are payable from net company profits, i.e. profits available after the payment of corporation tax at 19%.

Legally, a company may only pay out dividends if it has sufficient retained profits. If trading has been challenging in the past year, this may not be the case. Dividends must also be paid out in proportion to other shareholdings, so if retained profits are lower than usual and there are multiple shareholders, this will further impact the amount of dividend that can be voted.

All taxpayers are entitled to a personal dividend allowance which is £2,000 for the 2020/21 tax year. It is then possible to apply the personal income tax allowance to a dividend payment, reducing the taxable portion by a further £12,500 and creating an allowance of £14,500 before further tax is due. Beyond this, dividends are taxed at 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers. Whilst dividends are not tax deductible for the company, they do not attract national insurance contributions for either the individual or the company.

Renting office space and asset sales

Depending on your circumstances, you may be in a position to rent office or business premises to your company. Alternatively, you may sell an asset to your company (although this may attract capital gains tax which needs considering). Both of these options provide further ways of extracting funds from the company.

Other considerations

If you have a spouse or civil partner, it may be possible to create further tax planning opportunities provided sufficient funds are available.  To discuss any of these tax planning ideas, please contact partners@rjp.co.uk.

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30 April 2021 - ATED return deadline

If you own UK residential property valued at £500,000 or more in a limited company, the next deadline for filing ATED returns is 30 April 2021. This is needed even if there is no tax to pay. Be on time to avoid a penalty.