Case Study: Client Tax Scenario – Extracting profits from a business tax efficiently

The problem

Susan is director of a PR and marketing company. Her salary is £50,000 a year and she is a 40% rate taxpayer. She wants to take some profits out of the business and invest them elsewhere so, in 5 years or so, when her children are older, she can help them with deposits for their first homes. She has £50,000 of profit in the company that she wants to extract for this purpose.

The problem is that Susan’s already receiving a salary that puts her into the higher rate banding for income tax, so a further £50,000 dividend payment from her company would be taxed at an effective rate of 29.25%. This means that she’d pay £14,625 in tax and her £50,000 would shrink to £35,375. She’d like a tax-efficient solution that will allow her to extract these profits, without increasing her personal income tax liabilities.

Our tax-planning solution

If Susan invests in a Venture Capital Trust (VCT) or an Enterprise Investment Scheme (EIS), she should be eligible to receive income tax relief of 30% if the investment is held for the required minimum period. This is five years for a VCT and three years for an EIS.

So, looking at the figures, if Susan invests the £50,000 dividend paid to her she’ll be eligible to get tax relief of £15,000. This offsets the £14,625 personal tax due on the dividend, and provides additional relief against her salary income.

The figures have been adjusted to reflect 2016/2017 rates of tax.