Depending on how many business partners are involved in your partnership, each partner takes their slice of the pie and pays income tax on it accordingly.
This should be a key part of your business plan, and there are several ways for you or your partners to get paid for the hard work put in over the tax year.
However you access the profits from your partnership, you will be liable for income tax at various rates and bands – but let us focus on that while we tell you how to extract profit.
Extracting profit as salary
Paying yourself a salary of £8,424 a year usually makes sense before you consider any other extraction strategy.
If you or your partners extract profit as salary, you can expect to pay tax through PAYE and NICs on any income through salary above £8,424 in 2018/19.
The partnership may also have to pay class 1 NICs at 13.8% on any salaries above this amount.
Extracting profit as dividends
Extracting profits through regular dividends was one of the most popular tax-efficient strategies until recent tax changes came into force, which eroded the advantage of using this method.
The tax-free dividend allowance reduced from £5,000 to £2,000 on 6 April 2018. Above this, threshold dividends are taxed at:
|Annual slice of income (2018/19)||Tax rate|
|Up to £11,850||nil|
|£11,851 – £13,851||0%|
|£13,852 – £45,000||7.5%|
|£45,001 – £150,000||32.5%|
|More than £150,000||38.1%|
If you extract any profit in the form of dividends, you’ll need to declare the amount on your self-assessment tax return.
Extracting profit as pension
Taking money from the partnership for future use through pension contributions is another tax-efficient strategy, but not necessarily the most straightforward.
If you were to extract the minimum amount of profit required to fund your lifestyle and get the partnership to put the rest into your pension, you would not be liable for NICs.
However, your partnership could make employer contributions into your pension scheme without having to pay class 1 NICs.
So long as you don’t exceed the £40,000 pension allowance in 2018/19, you won’t be liable to pay tax on these contributions into pension scheme.
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