For business owners and entrepreneurs, managing taxes can make a big difference in profits.
This article provides easy-to-follow tax tactics for keeping more of what you earn.
Dive in to learn straightforward methods for boosting your financial success.
We will cover:
- The ins and outs of salaries, dividends, and tax-efficient ways to distribute profits among stakeholders.
- Various tax-free perks, pension considerations, and innovative methods for income distribution to family members
Salaries and remuneration
Directors often opt to pay themselves a salary to safeguard their entitlements to state pensions and benefits.
It’s recommended to set this salary above the NIC employee lower earnings limit but below the employee primary earnings threshold.
When considering NIC savings, a salary of £9,100 is ideal if the employer’s NICs allowance isn’t available, but if it is, £12,584 is more optimal.
Companies with a sole director earning above the employer’s secondary earnings threshold (£175 per week) cannot access the Employer’s NIC Allowance, which stands at £5,000 annually.
Extraction of profits: Dividends
When companies have sufficient distributable reserves, they can declare dividends to shareholders.
For the fiscal year 2023-24, the first £1,000 of any dividend remains tax-free, though this amount decreases in subsequent years.
It’s worth noting that dividends beyond this initial sum are subject to tiered taxation rates.
Unlike other forms of income, dividends aren’t subjected to NICs and are derived from post-tax profits.
While individual shareholders must pay tax on these dividends, other companies often receive them as exempt distributions.
- The first £1,000 of any dividend is tax-free for 2023-24. This reduces to £500 for 2024-25.
- Dividends in excess of this amount are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (upper rate).
Is the owner planning to retain profits within the company?
For taxpayers aiming to sidestep higher tax rates or certain tax at marginal rates, retaining profits in the company might be a viable strategy.
Some of these higher tax rates can include the clawback of Child Benefit payments through the High-Income Child Benefit Charge.
It’s wise to consistently monitor the company’s balance sheet, especially if a sale or retirement is on the horizon.
Is it appropriate to consider running an LLP in parallel to the company?
For individuals managing several businesses, incorporating a Limited Liability Partnership (LLP) alongside their company could prove beneficial.
With meticulous planning, an LLP can provide tax advantages and increased flexibility in extracting profits.
For instance, the LLP might offer specific services to the company, which, when billed appropriately, allows for effective profit distribution.
Is it possible to split income with spouse or family members to mitigate tax?
Splitting income with a spouse or other family members can be a strong tax tactic to reduce the tax burden.
For instance, a company might contemplate paying a salary, bonus, or other benefits to working family members.
It’s crucial to ensure that any earnings or benefits are proportionate to the individual’s role within the business.
One advantage is that employing a family member can allow a single director company to claim the Employers’ NICs allowance.
This applies if both the employee and director are paid above the NICs secondary contributions limit.
Tax-free benefits and taxable Benefits In Kind
Employees can avail several tax-free benefits that enhance their compensation package.
These can include, but are not limited to:
- Electric cars
- IT equipment
- Mobile phones
- Subsidised travel
- Staff parties, with a £150 per year limit
- Trivial perks, with a £300 per year limit
- Pension advice, with a £500 per year limit
- Lunch and refreshment, under the works canteen rule
- Allowances for working from home, which is up to £6 per week
- Using workplace electric car charging facilities
Contributions made by companies to pensions don’t result in any tax or NIC charges for the recipient employee.
Moreover, these contributions, made with the company’s business in mind, qualify for tax deductions.
However, it’s essential to remember that contributions must stay below the director’s annual allowance of £40,000 to prevent personal Income Tax charges.
This holds true unless there are allowances carried forward, with the lifetime pension allowance fixed at £1,073,100 for 2023-24.
Review taxable benefits
Reaping benefits like company cars, vans, or even phone contracts might come with tax implications.
Additionally, the company might offer assets, such as bicycles or older vehicles, to directors at a considerably lower cost than their initial price.
For companies regularly hosting events, like golf days, they might possess equipment that directors can borrow for personal use.
Such benefits should be properly documented, and any associated Benefit In Kind should be proportionally calculated.
Loans instead of pay
Loans, when offered by solvent companies, can sometimes substitute dividends.
But it’s crucial to remember that loans cannot replace already-agreed-upon salaries or bonuses.
These loans have specific tax implications, interest rates, and are governed by particular rules, like the ‘bed and breakfasting loans’.
If you’re contemplating renting your private property to your company, there are several things to consider.
Charging your company rent can be a good tax tactic, but the owner must declare this rental income, minus expenses, during Self-Assessment.
The company, in turn, gets tax relief on these rental payments.
Since 2021-22, mortgage interest doesn’t benefit from higher rate tax relief.
It’s imperative to have a documented license in place and consider potential impacts on tax reliefs, such as the CGT Private Residence Relief.
What to consider when extracting a mix of salary, dividend, and rent?
Balancing between salaries, dividends, and rent involves understanding tax implications and potential benefits.
When considering family members, assess if salaries are more tax-efficient than dividends.
Always ensure that rent charges are justifiable, especially when dealing with personal properties used in business.
Lastly, consider Pension planning and how assets might be incorporated into pensions or fund commercial properties.
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