Effective & efficient profit extraction for company directors

Sarah Hendy


Be that political change at home or abroad, the loss of iconic figures or the constant evolving world that is the financial services sector.

So, as providers and those of you who are advisers, our challenge is to constantly be ready to meet our clients’ requirements and provide the solutions to address their ever-changing needs.

It has been widely reported in the media that lots of company directors have maxed out or are about to max out their pension pots. Many are looking elsewhere for tax efficient ways to grow their wealth and provide for their retirement. The problem is how to extract profits from their businesses without being completely stung by the tax-man?


We know that where Company Directors hold surplus cash or retain profits within their companies that it can cause issues with their ability to utilise Business Relief (BR);

  • Too much cash could be classed an excepted asset so BR may no longer be applicable
  • If most of the company’s assets are being held in cash/other investments here is a risk the whole company no longer qualify for BR
  • And worse-case scenario, the company is holding so much cash it couldbe deemed as an investment company and when it is sold, the Directors may not even be entitled to Entrepreneur’s Relief (ER).


So what if you could offer your clients a solution? Well one potential option could be for the Directors to withdraw the surplus profits from the company in the form of an extra dividend.

Yes, dividend tax will be payable, but by investing the necessary amount in an Enterprise Investment Scheme (EIS) to off-set the Income Tax liability the Directors can start to grow their personal wealth which, ultimately, will help them extract the surplus cash held in a tax-efficient manner thus protecting the company’s ability to fully utilise BR/ER.

  • Withdraw surplus profits in form of an extra dividend
  • NB – tax will be payable
  • Divide the tax due by 30% and this will give the amount required to invest into an EIS and off-set the liability
  • EIS also benefits from 100% IHT relief after two years through BR if still held at time of death (they would have lost the IHT free status of the dividend withdrawal if it did qualify for BR in the company)
  • After four years when liquidity is expected, they can withdraw from the EIS tax free / tax paid.


To maximise the potential, a rolling strategy could be employed whereby each year, an additional dividend is extracted and invested into an EIS to offset the Income Tax liable. Now – and here’s the good bit – come year four when the first EIS is liquidated, the exiting money is reinvested to offset the dividend tax due in year five. The following year, the year two EIS money is reinvested to offset the dividend tax due in year six and so on.

So by employing a rolling strategy whereby the Director has completed this strategy for four years, the annual dividend is effectively tax free (as the liability is continually being off-set by the EIS reinvestment).

Now that sounds like a jolly good plan to me!



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