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Business Tax: Profit extraction, tax efficiency

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Lucy Mangan - Menzies Accountant

Lucy Mangan – Business Tax Partner

If operating a sole trader or partnership there may be limited options for profit extraction due to the nature of the structure.   

However, shareholders of a private limited company should carefully consider how the profit of the company is to be extracted to meet their short and long term financial needs.  Different tax rules and rates currently apply to salary and bonus payments, pension payments and dividends, with the latter subject to a lower tax rate and no national insurance.    Dividends, however, are not a tax-deductible expense for the company and are less flexible due to company law restrictions.   

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The structure of a companies share capital forms part of the remuneration strategy planning and both should ideally be considered  as early as possible in the life of the company with regular reviews to ensure it is still fit for purpose with the changing business.   However, it is never too late to consider and review the position.  

Ensuring the business is maximising any tax efficiencies will result in the business retaining more cash,  for example capital allowances, R&D reliefs so should not be overlooked.

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