Tax efficient profit for Worcestershire SMEs
R&D Tax Credits interact with SME profit extraction. Chris Williams explains the ThirdRock way…
Most company owners and directors will recall the year end meeting with their accountant and discussing the most efficient method for taking their company profits and a conversation around salary v dividend.
Traditionally, the savings in National Insurance Contributions have outweighed the company tax relief on salary, favouring the dividend approach with the optimum strategy landing on a combination of nominal salary up to the NI threshold with profit balance voted as dividend. Despite changes in dividend taxation, aimed at levelling the playing field, this strategy remains the most tax efficient method of profit extraction for the majority of company owner directors.
Chris Williams of Third Rock considers the director of an innovating company, qualifying for R&D tax credits who is devoting a high percentage of his or her time to projects and, who has received advice from their R&D tax credit adviser that the valuable 230% tax enhancement for R&D costs applies only to staff costs including salary but, not dividends. This advice comes as a shock to the director whose innovating company will be missing out on the valuable time spent by the director on R&D! Third Rock therefore pose the question to both directors and their accountants.. should this change the traditional thinking on profit extraction around salary v dividend, and/or which is best?
Unsurprisingly, it’s complicated and the answer to this question is that the numbers need to be crunched. For the tax techs and accountants amongst us, they will be aware that the outcome is dependent on calculating variables including the amount of time the director devotes to R&D, company tax position, the method of company tax relief taken with matters such as the Employment Allowance, R&D PAYE cap and NI and tax rates also need to be considered. However, recent studies by Third Rock have shown business owners devoting a high percentage of their time to R&D, enjoying a £60k profit paying less than 10% overall tax and £100k less than 20% overall tax (maximum profit extraction, all taxes).
R&D tax Credits are a generous cornerstone of the UK tax code and many companies do not realise that they may qualify. The Third Rock way is to take a holistic approach to prepare, maximise and expedite a robust HMRC tax claim to reward Worcestershire companies for their innovation.