As we approach the end of the financial year, it’s crucial for business owners to revisit their company’s financial health to ensure they are maximising their tax efficiency and have protections in place to cover against uncertainties. In the following blog we cover a few of the key financial and tax planning opportunities for business owners across the following four areas: Tax Efficient Profit Extraction, Corporate Structuring, Corporate Financial Planning, and Smart Tax Solutions.
Tax Efficient Profit Extraction
Dividends
Paying yourself through dividends is often more tax-efficient than a high salary because dividends are taxed at a lower rate than income tax, and furthermore they are not subject to National Insurance Contributions (NICs). Ensure you review your profit and loss statement for the year and have sufficient retained profits to distribute as dividends.
Pension Contributions
Making contributions to a pension scheme is not only a smart way to plan for your retirement but also an efficient tax strategy for business owners. Pension contributions made by your limited company are allowable deductions for tax purposes, therefore lowering the corporation tax bill and with no income tax nor dividend tax due.
Adding Directors/Shareholders
Involving family members in your business by making them directors or shareholders can help spread the income and take advantage of lower tax bands. As a director, a family member can receive tax relievable pension contributions and as a shareholder, they can receive tax efficient dividend distributions. This strategy must be carefully planned to comply with anti-avoidance rules and ensure the relevant agreements are set in place so that the day to day running of the business is not affected by the changes in directorships and shareholding.
Corporate Structuring
Capital Allowances
Take full advantage of capital allowances to reduce your taxable profit by writing off the cost of tangible capital assets against your business’s income. It’s important to claim for all qualifying expenditures to maximise relief.
Corporate Residency
The residency status of your corporation affects its tax liabilities. Companies are taxed based on their residency, so it’s essential to understand the implications and plan accordingly to optimise tax efficiency. Care should be taken with regards to anti-avoidance rules so seeking professional advice is recommended.
Corporate Financial Planning
Company Investments
Investing surplus cash can help generate income for your business. However, it’s important to consider the tax implications of your investments to ensure they are as tax-efficient as possible. Certain investments carry tax benefits such as not being subject to corporation tax on its income distributions.
Corporate Treasury
Effective treasury management can improve your company’s liquidity and enhance profitability. Strategies include optimising your cash management and considering tax-efficient short term financial products earning high interest rates with easy access.
Corporate Insurance
Investing in insurance not only protects both your business but also your family members. These types of insurance include Relevant Life Policies, Key Man Cover, Shareholder Protection and Private Medical Insurance. Certain policies can also provide valuable tax benefits, whereby premiums may be deductible as business expenses and therefore reduce the company’s corporation tax bill.
Smart Tax Solutions
Tax Loss Harvesting
This involves offsetting any capital gains with losses to reduce your tax liability. It requires careful planning and timing to ensure it is done effectively.
EIS (Enterprise Investment Scheme)*
Investing in small, high-risk companies through EIS can offer significant tax reliefs, including income tax and capital gains tax relief, making it an attractive option for tax-efficient investment.
VCT (Venture Capital Trusts)*
Similar to EIS, investing in VCTs provides tax advantages, including income tax relief on investments and tax-free dividends, supporting your investment strategy while reducing your tax liability. For business owner, receiving tax free dividends from a VCT is an especially attractive tax relief given that they are likely to have maximised their dividend allowance and are in a higher or additional rate dividend tax band. Once provisions for ISAs and Pensions are made, a VCT is a key tax-efficient investment to consider next for business owners.
As we conclude the financial year, employing these strategies can lead to substantial tax savings and financial improvements for your business. It’s important to consult with financial advisers and tax professionals to tailor these strategies to your specific situation, ensuring compliance and maximising benefits.
Join us for our webinar on Thursday 22nd February at 1pm to watch myself, Chenji, and my colleague Henry talk about all of this in greater detail. And of course, if we can help in the meantime then don’t hesitate to get in touch and book in a no obligation chat with us today!
Fusion Financial Ltd is an appointed representative of The On-Line Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
*Capital at risk.
The tax treatment is dependent on individual circumstances and may be subject to change in future. Tax planning advice is not regulated by the Financial Conduct Authority.
