Extraction of funds following incorporation

Produced by Tolley in association with

Owner-Managed Businesses

Guidance

This guidance summarises some of the different methods of extracting funds from a newly formed company following incorporation of a sole trade or partnership. Detailed guidance on extracting profits from owner-managed companies can be found in the Effective profit extraction ― overview guidance note.

Salary

Salaries can be paid to the directors, either as regular sums or as more infrequent bonuses, and are tax-deductible for the company. If the director has an explicit employment contract, they will receive the national minimum wage (NMW) in respect of work carried out under that contract, so it would not be possible to pay such a director solely by way of dividends.

The requirements of real time information (RTI) have made the payment of salary very rigid, and payments must be reported when made. There is also additional administration under this system that may negate any tax benefit from paying a nominal salary. This should be assessed on individual circumstances.

A salary / bonus is subject to income tax in the hands of the directors.

In addition

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Julie Butler

Managing Partner at Butler & Co Chartered Accountants & Registered Auditors

Julie Butler FCA is the founding director of Butler & Co Chartered Accountants, a firm that specialises in agricultural and land matters. Julie has lectured extensively on proactive tax planning for farmers and landowners, with an emphasis on diversification and development.Julie and her team provide tax consultancy services direct to the farming and equine industry and to other accountants, land agents and solicitors on farming diversification, bloodstock and all areas of the equine world.Julie's articles are published in the national accountancy and tax press and she is the author of the successful books Tax Planning for Farm and Land Diversification and Equine Tax Planning as well as being co-author of Stanley: Taxation of Farmers and Landowners with Malcolm Gunn. Julie is also editor of Farm Tax Brief and contributes to Tolley's Tax Planning.Julie is an authorised individual licensed by the ICAEW to carry out the reserved legal activity of non-contentious probate in England and Wales.

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