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What is the best way to extract funds from your company? 

Director shareholders understandably want to pay the lowest amount of tax and National Insurance possible whilst complying with their obligations under the relevant legislation.

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For many years the norm has been a high-dividends and low-salary strategy.

There were new dividend rules introduced in April 2016 which meant the above strategy is not as beneficial as it used to be, however, this is still very effective.

Currently, for dividends, there is an annual tax-free amount of £5,000 and anything drawn above this is taxed at 7.5%, 32.5% or 38.1%. The amount of tax is dependent on where the income slots in compared to the rest of your income whether being basic, higher or additional rate tax band. (Dividends continue to be exempt from national insurance contributions).

Planning note: It is important to remember that dividends can only be paid from retained profits in the company. If your company has no retained profits you cannot take dividends.

There are also other profit extraction options: paying interest on any funds directors may have loaned their company or re-examining tax-free benefits.

Director shareholders looking at implementing the high dividend, low salary strategy should ensure that they take at least a minimum salary to ensure that they are contributing towards their State Pension. For the 2017-18 tax year, this is a minimum of £157 per week or £8,164 per year.

For more information on this, or other tax-related queries, contact Exceed.