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How to take cash out of your business

While the prospect of having a surplus of money sitting in your business account is certainly not the worst problem a company can have, deciding what the best option for it is can still be an issue. The chances are that you do not want to leave it there so that you can be taxed on it, and it is also necessary to consider that such a surplus can create problems when applying for tax exemptions like business property relief. This article will look at what the best options are for using the profits from your company.

A personal or a company investment

It may be that you have a plan already mapped out for this money, such as using it to buy a home for your family or yourself, and if that is the case then it will simply be a matter of taking the money out of your business account and paying whatever the tax on it is. On the other hand, if there is no immediate need to use the money and you wish to invest it in a way that will grow it, then doing so through a limited company can be a good option. Should you draw the money out to make a personal investment in something like a house, the tax you would have to pay upfront would be in the region of 32.5%. This seems eye-wateringly high, but if you are transferring the money to an Individual Savings Account (ISA) you will not have to pay tax on the interest which means that once the upfront tax payment is met, it can grow.

On the other hand, keeping the money in your business account means that you will be liable for corporation tax upfront, but not dividend tax. Across a 10-year period, this can save you money in the region of £300,000. In the long-term, investing through a limited company is more profitable and will be a better choice unless you really need your surplus money for personal use.

Holding company or separate one

If you decide to invest via a company then you can either set up a holding company or a separate one. A holding company will own your main, trading business and take the money out of it as a dividend. A separate company takes the money in the form of a loan. Most accountants are likely to advise that the latter is more straightforward.

It is better to opt for one of these rather than just investing the surplus directly via your trading company, as that would leave you liable for tax on the VAT and payroll. Setting up a holding company and moving the profits to that as dividends will not cost you corporation tax, because this will have already been paid by the trading company before you moved them.

Investing in property

Once you have created a company through which to invest the profits, there are several ways you can invest them. A popular investment for many business owners is property and your business can acquire houses or flats that are then rented out. A downside of this is that your limited company will probably have to pay a higher interest rate than an individual with a mortgage, but buy-to-let property investments can yield very good returns if you are able and willing to wait for the right deal. It can also be worth looking at companies like Property Partner that give you ownership of part of the property for your investment, but also provide professional management and rent collection to minimise the time and inconvenience for you.

Investing in a pension scheme

Setting up a pension scheme and investing some of the cash from your main trading business into it is definitely something that you should consider. Not only will this help to secure your financial future after you retire, which is an issue of importance to everyone, it is also a good way of taking out money from the business without falling foul of tax penalties. It does not matter whether the money is being paid into the pension scheme by the individual or by the company itself, as either way it is not considered a benefit by HMRC. However, if the money is invested by the individual, then there is a limit of £40,000 per year that can be paid into it, whereas there is no such limit on what can be invested by the company.

Furthermore, company pension contributions reduce the level of profit recorded by the business and thus also cut the amount of corporation tax you will be liable for, but this will not apply if the contributions are made by you personally. If you decide to invest in a pension scheme you will have to choose between a standard personal pension plan or a self-invested personal pension (SIPP). Both of these offer tax relief benefits, but with a standard personal pension, the way your money is invested is generally determined by the insurance provider, whereas an SIPP gives you greater say over how the money is used.

Paying yourself a salary

This can be another way of taking surplus cash out of the business without being heavily taxed, but you will need to be careful in calculating how much of a salary to draw. You can pay yourself a salary of up to £11,850 a year without paying any tax on it, while there is a threshold of 20% on salaries up to £46,350, 40% on up to £150,000, and 45% on salaries above this. One sensible strategy could be to set your annual salary at slightly above the minimum threshold to be eligible for the state pension, but within the minimum 20% tax threshold. However, if you have a private pension scheme that you pay into, you can keep your salary at the tax-free level.

These are some of the ways that you can take surplus money out of your business, or invest it, without incurring major tax penalties.

Posted by Louise
April 9, 2019

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