Effective profit extraction ― overview

Produced by a Tolley Owner-Managed Businesses expert

Owner-Managed Businesses

Guidance

Extraction of companies’ profits will result in a tax charge and often national insurance contributions (NIC) being levied. Careful planning is crucial. This is generally a complicated exercise as there are many different factors to consider. As well as considering the tax impact of the chosen profit extraction strategy, it is important not to lose sight of the commercial, legal or long-term implications.

Background

Profits within a company will be taxed under corporation tax. Once profits are extracted, they are subject to taxation again in the hands of the individual owner. The rate and timing of the tax / NIC liability depends on the chosen method of profit extraction.

For further guidance on the calculation of corporation tax, see the Computation of corporation tax guidance note.

Summary of profit extraction options

There are a number of methods for an owner of a company to extract profit. These can be regarded as primarily falling into two categories: capital and income. These will often result in capital gains tax or income tax consequences, and the choice of

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