Top Profit Extraction Strategies for Owner Managed Businesses

For most owner managed businesses, deciding what to do with company profits is a familiar and recurring challenge. Whether you are looking to extract profits for yourself, reinvest in your business or planning for the future, having a clear profit extraction strategy is essential. The right approach can make a significant difference to your personal finances, the health of your business, and your overall tax efficiency.

Should you take the cash or leave it in the company?

One of the first decisions you will need to make when considering your profit extraction strategy is whether to take the profits out of the company at all. In some cases, leaving profits in the business can be the most tax efficient and financially beneficial option. This can be the case if you are looking to reinvest in equipment, expand into new markets, or maintain a strong cash position to improve your resilience against unexpected costs.

However, there are times when extracting profits makes sense. For example, you may want to pay yourself to meet personal financial goals, fund property purchases, support your family, or diversify your investments outside the company.

Deciding between these options will require you to balance your business’s growth and your personal financial objectives.

Top profit extraction strategies for owner managed businesses

Once you have considered your objectives, you will be able to start constructing your profit extraction strategy. It is important to note that these are only basic strategies, and in most cases, we find that many business owners combine several methods to create the most efficient plan. We recommend seeking specialist tax advice before acting on any of these strategies.

1. Taking a salary

Paying yourself a regular salary provides you with predictable income and counts towards your state pension. In addition, it reduces your company’s taxable profits for corporation tax purposes. However, it is subject to both Income Tax and National Insurance contributions, so finding the right balance between salary and other cash extraction methods is key.

2. Taking Dividends

Taking dividends is generally more tax efficient than salary, as they attract lower tax rates and no National Insurance. However, they are not deductible for corporation tax purposes, so they do not reduce your company’s taxable profit. So, it is important to balance taking a salary or dividends very carefully.

3. Company Pension Contributions

If you do not need immediate access to funds, company pension contributions can be one of the most tax efficient ways to take money from a company. They reduce taxable profits and grow free from income tax until you draw them in retirement.

The amount of contributions will be limited to the available annual pension allowances plus any unused annual allowance from the previous 3 tax years, if these are exceeded a tax charge can arise. It is important to take advice before any contribution is paid.

4. Interest on Shareholder Loans

If you have loaned money to the business through a shareholder loan you can charge interest on this which creates a deductible expense for the company whilst providing you a taxable savings income.

The company will however be required to withhold 20% income tax and remit it to HMRC.

5. Renting Property to the Company

If you personally rent a building or other asset to your business, charging rent can be an effective profit extraction method. This can provide you with an additional source of income and depending on other situations it can deliver tax advantages. The rent will be deductible for corporation tax purposes and whilst it is taxable on the individual no NIC will arise.

6. Involving Spouses or Adult Children

If you employ family members who genuinely work in the business, you can make full use of multiple personal allowances and lower tax bands. This can significantly reduce the overall tax burden on profits extracted from the company.

7. Transferring Shares to Spouses or Adult Children and Paying Dividends

Transferring shares in your company to a spouse or adult children can also be an effective tax efficient profit extraction strategy. By doing so, dividends can be paid on these shares, making use of their personal tax allowances and potentially lower tax bands.

This approach can significantly reduce the overall tax payable on extracted profits. For example, if your spouse or adult child has little or no other income, they may be able to receive dividends within their personal allowance or basic rate band, meaning profits can be drawn from the company at a much lower tax cost than if you had taken them personally.

There are, however, important considerations:

• Genuine Ownership: The transfer of shares must be a genuine and an outright gift, with the recipient holding full rights to the shares.
• Family Circumstances: While this can be a tax-efficient strategy, it is important to consider family dynamics and the practicalities of shared ownership.
• Anti-avoidance Rules: Care needs to be taken to ensure that arrangements are not caught by the “settlements” legislation, which can apply if HMRC considers that income has been diverted without a genuine transfer of rights. Spousal exemptions often apply, but it is less straightforward with children.
• Long-Term Planning: Transferring shares is not easily reversible and may have capital gains tax and inheritance tax implications, depending on circumstances.

Used carefully, share transfers combined with dividend planning can help spread income across the family, maximising the use of allowances and minimising the overall tax burden.

8. Balancing Profit Levels for Marginal Rate Relief

If your company’s profits are just above the lower profits threshold, you may be paying a higher marginal rate of corporation tax. Making pension contributions or increasing salaries can reduce profits to a level where you benefit from lower tax rates.

9. Leaving Profits in the Company

Sometimes, the most strategic choice is to retain profits in your business. This can help build cash reserves, strengthen your balance sheet, support growth plans, or position your company more attractively for potential investors.

The increased value may then be able to be realised as a capital gain liable to CGT if the company is later sold.

Combining Methods for Maximum Efficiency

In many cases, the most effective profit extraction strategy is a blend of different approaches. By using a mix of salary, dividends, pensions, and other methods, you can balance immediate personal income needs with tax efficiency and long-term business growth.

How to decide the best strategy?

Choosing the most tax efficient way to take money from a company is rarely straightforward. The interaction between Income Tax, Corporation Tax, and National Insurance Contributions can be complex, and the right answer will depend on your personal and business goals.

As Hawsons Tax Partner Aaron Hemmington explains:
"Profit extraction is about balancing tax efficiency with immediate needs, long term goals, and the health of the business. The right plan should be unique to each owner managed business, which is why it is worth getting it right from the start."

At Hawsons, our experienced tax advisers work closely with owners to develop a tailored profit extraction strategy that meets both personal and business objectives. If you would like to discuss the most tax efficient ways to take money from a company, we are ready to help.

How We Can Help?

At Hawsons we have a dedicated team of GP accountants that offer a specialist service to GPs and their practices, utilising our in-depth knowledge and experience in the sector.

Our accountants are up to date with the changes in the health service and recognise the need for doctors to devote maximum time to patient care. We strongly believe that through the use of our specialist knowledge and expertise this can be achieved.

If you would like to get in touch, please use the contact form below.

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