CASH extraction from your business is possible through various methods, from dividends, pension contibutions, share buybacks and many more.

Careful consideration as to the lawfulness and tax efficiency of such methods must be given when contemplating extracting value in terms of both personal liabilty and that of the company. A company proposing to extract value must do so with regard to its constitution (Memorandum and Articles of Association) and the Companies Act 2006.

The company must have “profits available”

to make the distribution (often referred to as distributable profits) and it must be justified by reference to “relevant accounts”.

Additional rules apply to public and investment companies.

Company directors must also have regard to their statutory and common law duties before recommending any distribution.

Cash extraction via salary and bonuses has fallen out of favour following the introduction in April 2010 of the new 50 per cent income tax rate for taxpayers with income over £150,000.

Cash extraction via dividend is probably the most common method, although this may not be the most tax efficient. Dividends are paid out after tax profits and therefore a company does not get any financial benefit from paying a dividend.

Dividends are taxed in much the same way as salary. The tax payable by the individual will be dependent on the size of the company and whether the individual is an higher rate tax payer.

A transfer of a non-cash asset to shareholders, such as shares or a car, will not be a distribution and subject to the statutory rules if the transfer is made at market value.

If an asset is transferred at less than its value, i.e. for free, there will be a distribution of an amount equal to the difference between its value and the amount paid by the shareholder for the asset. This amount must be within the company’s distributable profits.

Shareholders and directors must be careful of a distribution which is unlawful, such as a dividend declared or an asset transferred in excess of a company’s distributable profits.

A shareholder who knows or has a reasonable belief that a distribution (or part of it) is unlawful is liable to repay it (or the portion of it that is unlawful).

A director who authorises an unlawful distribution may be in breach of his statutory and common law duties and may be personally liable to repay the unlawful sum to the company, even if they’re not a shareholder.

Cash extraction needs careful planning and advice should be sought from both the company’s solicitor and accountant or tax advisor to ensure that the distribution is lawful and as tax efficient as possible.

■ Zoe Dick is a solicitor in the Business and Company Law team at BHP Law and can be contacted on 01325-376430.