Contractor's Questions: How to best take profits out of a Limited Company?

Contractor's Question: I am unsure of the most tax-efficient way to take profits out of my company after the emergency Budget. I already take a market-rate salary so I could take the profits as a bonus or dividend. Should I be considering a different structure for the business?

Expert's Answer: The emergency Budget affects the tax analysis for 2011-2012, but does not change the position for the current tax year. The most tax-efficient route to take profits out of your company will depend on its level of profits and your income.

If you are a higher-rate taxpayer in 2011-2012, with an income in the 40% or 50% tax bracket, a dividend will be more tax efficient than a bonus. Someone paying income tax at 50% and a company paying corporation tax on profits at the small company rate of 20% will pay a total of £956 in tax to get £1,000 in their pocket. With a bonus, you would pay a total of £1,371 in PAYE and National Insurance.

If your income falls in the 40% tax rate bracket, the preferred route is the same. A dividends from a company paying corporation tax at 20% will incur a total tax (corporate and personal) bill of £666 to get £1,000 in your pocket. The equivalent bonus would set you back £962 in PAYE and National Insurance.

If you are open to changing the structure of your business, then being taxed as self-employed may be more tax efficient if the company is paying tax at a rate higher than the small companies' rate. However, the emergency Budget announced a full review of the corporation tax system, and the small business tax system, so any benefits you may get from changing structure may be short-lived.

The expert was Jon Sutcliffe, tax partner at Kingston Smith LLP.

Editor's note: Further Reading -
How to wind up with a low tax bill?
How do I take money out of a company I'm closing?