As the 2012/13 tax year comes to an end, there is another change in your personal allowance and tax thresholds to be aware of, coming into effect from 5 April 2013. The question this raises is “How should you extract profits from your business is the most tax efficient manner for 2013/14?”

As always the extraction of funds needs to be a mixture of dividends and salaries, but what is the best solution to utilise all of your allowances while minimising your personal tax liability? We have two methods below, one taking a salary within the national insurance threshold and the other taking a salary within the personal allowance threshold, which will give rise to a small national insurance bill.

Option 1 – Taking a salary within the national insurance threshold

The national insurance threshold for 2013/14 is £148 per week, therefore you can pay yourself an annual salary of £7,696 (£641 per month).

The basic rate tax band has fallen from £34,370 to £32,010 (any amount over this figure would attract personal tax on dividends), taking into account the above salary and the tax credits on dividends you could take £30,379 of net dividends in 2013/14 before paying any personal tax.

Option 2 – Taking a salary that utilises your personal tax free allowance

The personal tax free allowance for 2013/14 has increased from £8,105 to £9,440, which would be a monthly salary of £786. However, with an annual salary of £9,440 you will incur an employee national insurance bill of £203.04 and an employer’s national insurance liability of £240.67.

Based on the above salary of £9,440 you would be able to take dividends of £28,809.

With this option, due to the increase in salary and the additional employer’s national insurance contribution, there will be a corporation tax saving of £396.94. If we compare the two options we can see the difference in net take home pay.

As you can see, by extracting the funds by option 2 you are £29 worse off personally, due to incurring national insurance (£38,075 vs £38,046).  When you consider the overall wealth, including the company, you are worse off by a further £17, so £46 in total. Option two also requires paying PAYE deductions every quarter, so increased administration on top of the cost.

 You may want to take more money out of your company, more options to consider include:

• Additional shareholders
• Pension contributions
• Gift Aid

If these are not an option then the higher rate of tax on dividends ranges from 25% (of the net dividends, up to a total gross income from all sources of £150,000) to 30.5%.

The above calculations are based on an individual under 65 years old and not receiving any other income. They are also for illustration purposes only and do not constitute tax advice. We would recommend that you seek professional advice before planning your own tax strategies.

At Nimbus Accounting, our aim is to make sure all of our clients minimise their tax liability, to help them grow and develop their businesses in these tough economic times.