Best Way to Extract Business Profit

Published / Last Updated on 14/05/2021

The Best Way to Extract Business Profit

e.g,  £30,000 PROFIT - Dividend v Pension.  We think pension is usually better than dividend now across all scenarios

£30000 Paid to You

Dividend – paid out to you as net dividend

Pension - £30000 Paid into Pension

Corporation Tax Payable 20%

£6,000

NIL

Net Payment to you

£24,000

£30,000

Employers National

Insurance

NIL

NIL

Employees National Insurance

NIL

NIL

Money Now in Your Name

Basic Rate Taxpayer (20%)

£24,000 Dividend

less £2,000 Tax Free Dividend Allowance

£22,000 taxed at 7.5% = £1,650 Tax

 

In Your Pocket

£24,000 less £1,650 Tax = £22,350

£30,000 in pension fund

But if then use flexible drawdown

£30,000 X 25% Tax Free Cash = £7,500

£22,500 X 20% Income Tax = £4,500 Tax.  Net Left = £18,000

 

In Your Pocket £7,500 + £18,000 = £25,500

Money Now in Your Name

Higher Rate Taxpayer (40%)

£24,000 Dividend

less £2,000 Tax Free Dividend Allowance

£22,000 taxed at 32.5% = £7,150 Tax

 

 

In Your Pocket

£24,000 less £7,150 Tax = £16,850

£30,000 in pension fund

But if then use flexible drawdown

£30,000 X 25% Tax Free Cash = £7,500

£22,500 X 40% Income Tax = £9,000 Tax.

Net Left = £13,500

In Your Pocket

£7,500 + £13,500 = £21,000

Money Now in Your Name

Higher Rate Taxpayer (45%)

£24,000 Dividend

less £2,000 Tax Free Dividend Allowance

£22,000 taxed at 38.1% = £8,382 Tax

 

 

In Your Pocket

£24,000 less £8,382 Tax = £15,618

*£30,000 in pension fund

But if then use flexible drawdown

£30,000 X 25% Tax Free Cash = £7,500

£22,500 X 45% Income Tax = £10,125 Tax.

Net Left = £12,375

In Your Pocket

£7,500 + £12,375 = £19,875

 

 

*May pay additional tax if Tapered Annual Allowance applies to Pension Contribution

Tax on Death E.g.  Basic Rate Tax Payer

Inheritance Tax 40% =

£22,350 X 40% = £8,940

 

Net Paid to Loved Ones £13,410

(more than half of starting £30,000 gone in tax)

Untouched Pension Fund =

£30,000 paid to loved ones

 

or Drawdown Pension Balance

Death before Age 75 = NIL TAX

Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax

Could be 100% of £30,000 never gets taxed

Tax on Death E.g.  Higher Rate Tax Payer

Inheritance Tax 40% =

£16,850 X 40% = £6,740

 

Net Paid to Loved Ones £10,110

(nearly 2/3rds of starting £30,000 gone in tax)

Untouched Pension Fund =

£30,000 paid to loved ones

 

or Drawdown Pension Balance

Death before Age 75 = NIL TAX

Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax

Could be 100% of £30,000 never gets taxed

Tax on Death E.g.  Additional Rate Tax Payer

Inheritance Tax 40% =

£15,618 X 40% = £6,247

 

Net Paid to Loved Ones £9,370

(more than 2/3rds of starting £30,000 gone in tax)

Untouched Pension Fund =

£30,000 paid to loved ones

 

or Drawdown Pension Balance

Death before Age 75 = NIL TAX

Death After Age 75 = Loved ones pay tax when drawing pension fund at their rate of income tax

Could be 100% of £30,000 never gets taxed 

The above are very basic, low level calculation examples but we hope you get the 'gist'.

Contact  Book A Call  Calculators  Get A Quote

 

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