Why are you in business?
Is it for the freedom?
Is it for the security?
Is it for the money?
People run businesses for a variety of different reasons but one of the main driving forces for most people is to make a decent living for themselves and to provide an attractive lifestyle for their families.
It seems a dreadful shame, therefore, for you to work long and hard running your business and growing it profitably only to lose out by paying more tax than you really need to.
Why should your net spendable income be lower than it could be as a result of you failing to adopt well proven and perfectly legitimate techniques that help you extract those well-earned profits more efficiently from your business?
This is the first of a series of articles which will help you identify ways of withdrawing profits from your business more effectively; giving you more money in your pocket.
Profit extraction point 1 – Incorporation of your business
If your business operates as a sole trader, partnership or LLP the profits you make are the profits that you are taxed on, subject to any adjustments that may be required to reflect various expenses which are not allowable for tax purposes and some favourable adjustments that provide you accelerated tax relief if your business has invested in certain items of capital expenditure.
In essence, it makes no difference to your tax bill whether the profits you have made are held within the business or withdrawn by you for your own personal use.
This means that if your businesses is successfully generating high profits you could be paying income tax at a rate as high as 45% even if you decide to keep most of the money in the business and to limit your personal drawings to just a fraction of the profits it has generated.
On the other hand, if you were to run your business through a limited company, the total tax paid by the company would only be 19% (and this is reducing to 17% in 2020).
The amount of tax that you would pay personally depends entirely on how much you decide to withdraw from the company and in what form you decide withdraw it.
Over the next few articles we will outline some of the common ways in which you can extract profits from your own company.
Your business’s cash flow will benefit by it paying a low rate of tax.
You will benefit by keeping your own personal tax to a minimum and making it dependant on how much you want to take out of the business and in what form.
There are, however, various other factors besides tax to consider before you decide to incorporate your business, so it is important you seek professional advice before proceeding.
Should you wish to pursue this alternative route further, please feel free to get in touch with one of our SME specialist partners, Graeme Hindley, who will gladly discuss matters with you.