Profits extracted from your business up to £25,000 attract Capital Gains tax (CGT). In some cases, the amount of tax you pay can be lowered to a rate of 10% by claiming Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.
So what if your profits are higher than £25,000? Retained profits exceeding £25,000 are subject to income tax, which could make your tax bill significantly higher when voluntarily striking off your company.
You could extract them as a dividend or director’s salary, but your personal tax rate will dictate how much tax you ultimately pay. The dividend tax rate is currently 8.75%, 33.75%, and 39.35% if you’re taxed at the basic rate, higher rate, or additional rate respectively.
It’s clear then that the level of retained profits in your business is a key indicator for the most tax-efficient way to close it.