As a business owner, it is important to regularly review its financial position and see if there is any surplus cash you can extract, says Vinku Shah…

If your business has surplus cash that you have helped generate, there are various ways you could extract it from the business. So, here are some of the cash extraction opportunities available to you.

Salaries

As a director of a limited company, you are entitled to be paid a salary for your work and so are members of your family who work for the company.

Paying at least a small salary can be very beneficial, particularly when the recipient does not already have the 35 qualifying years needed for entitlement to the full single-tier state pension, which is payable to those who reach state pension age on or after April 6, 2016.

To preserve entitlement to state pension, and to ensure the year counts as a qualifying year, it is advisable to pay a salary at least equal to the lower earnings limit for National Insurance Contributions (NIC) which is set at £578 per month for 2023/2024 i.e, £9,100 per annum.

Salaries may be beneficial where funds are needed in a recession for example, and the company does not have sufficient reserves to pay dividends.

Dividends

The annual tax-free dividend allowance for 2023/2024 is £1,000. Although referred to as an “allowance,” it is actually a zero-rate band and therefore uses up your basic or higher rate band as appropriate.

Dividends are treated as the top slice of income and for 2023/2024, dividend income is taxed at 8.75 per cent to the extent it falls within the basic rate band, 33.75 per cent if it falls within the higher rate band and 39.35 per cent to the extent it falls within the additional rate band.

It is important to put together all your sources of income before deciding on the level of dividends to draw as these other sources of income will utilise the basic rate band before dividends can be taxed. The company will need to have sufficient reserves to be able to pay a dividend to its shareholders.

Tax-free benefits

There are a few exemptions in relation to benefits in kind and making use of these is a way of extracting profits from the company free of tax and NIC although certain conditions do still apply to them.

Some of these are the provision of mobile phones by the company, meals provided on the employer’s premises, parking provided at or near the workplace or mileage allowance when using own vehicles for business.

This list is not exhaustive, but you should seek advice from your accountant on these benefits.

Company Cars

Until April 1 (April 5 for income tax) 2025, the cost of acquiring new electric or new zero emission cars will qualify for 100 per cent First Year Allowances (FYAs) in the year of purchase.

Electric cars with CO2 emissions lower than 50g/km will qualify for 18 per cent Write Down Allowances (WDA) and those with CO2 emissions more than 50g/km will attract main rate allowances at six per cent on reducing balance basis therefore it may be beneficial to purchase a new and unused electric vehicle if the cashflow permits as this will reduce the corporation tax liability or increase the tax losses that can be carried forward to offset against future taxable profits.

The director or employee provided with electric and low CO2 emission company cars will also benefit from low benefit in kind charge of two per cent for 2023/2024 for 100 per cent electric cars and cars with CO2 emissions of less than 50g/km and have a range of at least 130 miles.

Trivial benefits

This is an exemption covering benefits not costing more than £50 and are not provided in recognition of a particular service or under salary sacrifice arrangements.

Where the company is a close company, the amount that can be provided to the directors and members of their family is restricted to £300 per year and these are deductible in computing the company’s taxable profits.

Share structure

Most family businesses will have a few shareholders sometimes having different sources of income on top of salary and dividends from the company.

Where the same class of share is owned by the shareholders, with varying external personal income, dividend planning becomes difficult as the same amount of dividend would have to be paid to each shareholder and as a result some may end up paying a higher rate of tax or some may not utilise their full basic rate band.

Provided there are no immediate plans to sell the business, a way around this is to issue alphabet shares which will allow each different class of shares to receive differing amount of dividends.

Pension provision

The employer can contribute to an employee’s pension and is made gross and no tax or NIC is payable by the employee in respect of the contribution. The annual allowance for pension contribution is £60,000 per person from April 1, 2023 and this is tax deductible when computing the company’s taxable profits.

For 2023/2024 this would equate to a maximum saving of £15,000 in corporation tax (£60,000 at 25 per cent) per person contributed. Also note that any unused allowance for pension contributions can be carried forward up to a maximum of three years.

Some of these points will need consideration of your own personal tax position therefore it is vital you have conversations with your accountants should you need to extract cash from the company efficiently.

Vinku Shah is a partner at Silver Levene.