Profit Extraction

Profit Extraction

As the owner of an ‘owner managed business’ company you are likely to be very pleased with yourself if you complete your end of year accounts and find that your business is in profit – and rightly so! However as a company you are liable to pay corporation tax ( also known as company tax / business tax) on any profits made.

In addition, should retained profits held in the company become too great as a proportion of its turnover, it may prejudice the ability to claim Entrepreneur’s Relief benefits.

Your options in this situation are:

Leave the profit

Leave the profit in the company and pay Corporation Tax.

As of 1st April 2015 the corporation tax rate is 20%.

Invest the profit

If you invest the profit either internally or externally this can be an effective way of tax planning as you may no longer be liable to pay Corporation Tax (as long as the investment does not count as a taxable asset).

A ‘Generally Accepted Accountancy Principles’ (GAAP) valuation will take place to establish the difference in the amount paid and the actual market value of an asset. Sovereign Corporate can help if you decide to go down this route as a tax efficient profit extraction scheme.

Extract the profit

If you choose to take the profit out of the company for yourself (and why not?) this is usually paid as ‘dividends’ and will be liable to tax. See our Tax on Dividends page for details of dividends tax rates.

If you extract the funds via your director’s loan account and do not repay within 9 months of the company year end, the company will be liable to pay tax under Section 455 of the tax return.

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