1. Deliberately decide what to take out
Why? Because getting the best tax results is never a matter of chance
The most tax efficient way to extract profits for director-shareholders is usually to pay a minimal salary and top up with dividends. The salary level can be pitched to keep state pension entitlement, but stopping short of the point at which National Insurance contributions (NICs) are due. This strategy can lead to considerable savings in NICs.
Dividends have their own tax treatment. Basic rate taxpayers pay tax at 7.5% on dividends, higher rate taxpayers 32.5% and additional rate taxpayers 38.1%. Taken alongside the Dividend Allowance, £2,000 in 2019/20, this can produce very favourable results. Remember however, that company profits taken as dividends are chargeable to corporation tax - currently 19%.
Where finances are such that you don't actually need to extract profits, consider leaving some in the company. Although they stand to be taxed at corporation tax rates, this is still lower than paying at income tax rates. Retained profits can be used to fund expansion, possibly bringing future business development a step closer. On the other hand, you don't want to become an accidental investment company - see resolution number 5.
2. Think pensions
Why? Because pensions for directors provide ideal planning opportunities
Extracting profit from your company via pension contributions can be very tax efficient. If the company makes employer pension contributions for directors, it is generally free of tax for the director. There is no National Insurance for the employer or director on the contribution. The company should also qualify for tax relief on the contribution. There is potential to make contributions for a spouse also employed by the company.
There are still limits to watch. The annual allowance - usually £40,000 - is the total employer and employee contribution that can be put into a defined contribution pension scheme each year. However, the annual allowance can fall by £1 for every £2 of 'adjusted' income over £150,000, until it reaches a minimum of £10,000. Adjusted income includes not only total income, but the value of employer pension contributions for the year.
On the other hand, there may be unused annual allowance from the three previous years, which can give scope for significant pension contribution without a charge. Please don't hesitate to contact me for advice.
3. Review loans from the company
Why? Because your loan account has tax implications for both you and your company at the year end
Director-shareholders in family companies often have a 'loan' advance from the company. A director's loan is any money received from the company that is not salary, dividend, repayment of expenses, or money you have previously paid into or lent to the company. Loan advances often represent personal expenses paid by the company. That sounds technical, but is actually as simple as putting a pony magazine for your daughter and a six pack of crisps on the company card when you fill up with fuel.
If you have a loan from your family company, the company faces a tax charge if it's not paid back within nine months of the end of your accounting period. This is an amount equal to 32.5% of the loan. If you pay it back within nine months, there is no tax charge.
There are tax efficient ways to make the repayment, including awarding a valid bonus or dividend. HMRC is wary of arrangements where a director repays a loan in time to avoid a tax charge, but then takes out a second loan for a similar amount almost immediately. This is a complex area and I am always happy to advise.
4. Work out where family fits in
Why? Because employing family members multiplies tax efficiency
Look for opportunities to involve your family in the business. Which areas of work could you effectively delegate? Employing a spouse, sibling or the next generation can mean more opportunities to extract profit from the company before higher rates of income tax come into play. The rider is that profit extracted for family members needs to reflect commercial reality, and match the work they actually do.
5. Plan ahead
Why? Because some of the most important tax reliefs available to your company can easily be lost
It's very easy to get bound up in the day to day running of your company and lose the long term perspective. But eventual access to reliefs like Entrepreneurs' Relief (ER) for capital gains tax purposes and Business Property Relief (BPR) for inheritance tax can be significantly affected by decisions you take now. Recent change to rules on ER makes it more critical than ever before that shareholding, voting rights, entitlement to distributable profits and assets available on a winding up are correctly structured.
Getting it right here will help with another resolution: don't accidentally turn from a trading business into an investment company. This can be a risk if your company buys land or property, or you retain considerable profits in the company. For ER on the sale of a company, there may be an issue where 20% or more of the total value of the company stems from non-trading investment activities. Availability of BPR can also be affected if non-trading assets are more than 50% of the value of the company.
Please contact me to shape tax efficient, bespoke solutions for you and your family company.