Once your optometry business is up and running successfully, there’ll be one thing at the forefront of your mind – which method of profit extraction is best?
Establishing how to earn a comfortable salary from your business in the most tax efficient way possible is a key goal of many new business owners. Once you’ve taken away the running costs, such as ordering stock, paying employees, meeting franchise requirements, and investing in equipment, there are a few key ways that you can extract an income from the remaining profit.
There are varying factors that will influence the efficiency of different methods for profit extraction. Whether you choose to take a salary as your employees do; make pension contributions; or pay yourself dividends, these each require careful consideration.
1. Taking a salary
Receiving a salary from your own business works much the same as if you were employed by someone else; you are entitled to the £12,570 personal allowance before being subject to Income Tax. This is a good way to ensure that you benefit from the tax-free allowance, whilst also making enough National Insurance Contributions throughout your career to qualify for a full state pension.
Speaking of pensions…
2. Making pension contributions
Have you been taking advantage of the tax-free pension allowance? Not only is extracting profit via pension contributions tax efficient, but it’s sensible preparation for your retirement. Taking an employer pension from your business is classed as a business expense, reducing your Corporation Tax liability. Meanwhile, personal pension contributions are exempt from National Insurance and subject to deferred income tax upon withdrawal – the tax savings from this could add up significantly over the span of your career!
3. Paying yourself dividends
The tax-free dividend allowance is a great way to top up your income once you’ve maximised the personal allowance. Dividend payments can be made to anyone who owns shares in a company. For this tax year, you’re entitled to take £1,000 in dividends without paying tax. Once you have exceeded the allowance, any further dividends will be taxed at 8.75% until your income reaches £50,270. Any dividends paid between £50,270 and £125,140 are taxed at 33.75%, and then at 39.5% above £125,140. When compared to the PAYE income tax rates and NI deductions when taking a salary, dividends offer a tax efficient method of profit extraction!
Whether you decide on one method of profit extraction or combining several to minimise tax liabilities, deciding on an efficient way of receiving income from your business requires careful planning and consideration.
If you would benefit from more detailed business guidance, please don’t hesitate to get in touch with a member of our team on 01942 816512 or email:
Chris Barlow, Tax Manager: [email protected]
