It’s one thing to have a business that is doing well and generating a healthy profit, but what more can be done to ensure you are making the most of your income?
There are a variety of options currently open to Owner Managed Businesses and Individuals that include some very useful reliefs from taxation. These options should be considered for anyone looking to extract profit from their business.
With the top rate of income tax currently at 45% for some types of income, it is important to think about the most tax efficient way of extracting profits from a limited company. For the director/shareholder there are several ways of doing this; including taking dividends instead of salary, company contributions to a pension and receiving tax efficient benefits. There are also tax efficient investments that can be used for personalised withdrawals of income. These will be explained a little later.
Our blog on dividends explains more about the benefits of drawing a dividend from your company instead of wages.
Contributing to a Pension
Contributions to a pension are both tax-efficient for employers and employees/directors alike. Employer contributions to an employee‘s pension is a legitimate business expense (akin to a salary payment) which will mean more corporation tax relief for the business.
This contribution will also be free of income tax and national insurance for the employee (up to certain annual limits). Individuals can also claim tax and national insurance relief for contributions they make to personal pension schemes (again, subject to limits, measured by their earnings and an annual allowance).
You can find more information on the tax reliefs of a pension by clicking here.
Family tax planning
Structuring a family-owned business in a commercial and tax-efficient way can maximise the amount of tax reliefs that are available to the business. Tax should also be an important consideration in succession planning. This can be of particular of benefit when considering the impact of Inheritance Tax and its relation to the passing on of a family business, due to the potential use of Business Property Relief and Agricultural Property Relief.
More information on business property relief can be found with this link.
Enterprise Investment Scheme
An Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. Subject to specific conditions being met, individuals are able to obtain up to 30% income tax relief against their initial investment (subject to a maximum amount of tax they have paid) in newly issued shares in unquoted companies. An EIS also incurs no Capital Gains Tax on profits made from the investment on realisation.
More information on Enterprise Investment Schemes can be found here.
Venture Capital Trusts
A Venture Capital Trust (VCT) is an investment scheme first introduced by the Government in 1995 to provide a source of financing for small UK businesses. A VCT is a type of stock exchange listed company that invests in small UK businesses who are themselves either unquoted or traded on the Alternative Investment Market (AIM).
Because the Government regards these types of businesses as critical to the growth and dynamism of the UK economy, it provides VCTs with tax benefits to incentivise investment into this area of up to 30% income tax relief against their initial investment (subject to a maximum amount of tax they have paid). Like an EIS, a VCT also incurs no Capital Gains Tax on profits made from the investment on realisation.
Here is a link to more information on Venture Capital Trusts.
If you would like more information on the above, or investments in general, please do not hesitate to contact our colleague who specialises in these departments. Andrew Palmer can be reached on 03301 330 122 or 07775 860 485. Alternatively you can email him at [email protected]