Building a business takes blood, sweat, and tears. It inevitably becomes a huge part of your life.
After years of hard work, you might find yourself a top of a tower of your achievements, a Nakatomi Plaza of your own creation, celebrating while you drink in your success.
Then suddenly the party is over, and you’re being held hostage by Hans Gruber and his pseudo terrorist cronies.
The terrorists in this analogy are all those unnecessary Corporation Taxes you might find yourself facing while you’ve worked hard to build your company up. At times it might feel like having a gun to your head, especially when there’s an ongoing cost of living crisis cranking up the pressure on businesses.
The Federation of Small Businesses (FSB) reports that the majority of small firms are expecting no or negative growth in the coming year, as rising expenses stifle investment plans and hinder economic development.
So, where’s your John McClane when you need him?
Well at Grey Parrot, we’ve taken it upon ourselves to don that white vest and come to the rescue — yippee ki-yay!
Read on to discover six ways to take profit from your business tax-efficiently and keep your company, as well as your own aspirations, on track to meet your long-term goals.
1. Take a salary from your business
It is important to take home a salary from your business as its not only money in your pocket but additionally it is a business expense that you can use to reduce Corporation Tax.
Instead of opting to give yourself a large salary, it could be beneficial to pay yourself the minimum.
A significant salary will place you in a higher- Income Tax band. But if you choose to pay yourself the minimum weekly income that requires National Insurance contributions (NICs), you can still qualify for the State Pension and reduce your tax obligations.
According to the government, this is £175.01 a week (2022/23 tax year) or £9,100.52 a year.
This amount is also below the Personal Allowance limit of £12,570, so you won’t have to pay Income Tax on your salary.
If you have employees, you can also benefit from the Employment Allowance (EA) which lets you reduce your annual NICs by up to £4,000. This would then allow you to pay yourself up to the Personal Allowance limit before using the EA to cover your Employer NICs outgoings.
Even McClane took home a police detective’s salary, so make sure you get paid.
2. Claim for every possible business expense
It might seem obvious, but it is important to claim for every possible legitimate business expense when completing your company accounts.
Business expenses will reduce your reported profits and the resulting Corporation Tax bill.
You can claim for a whole range of expenses including rent, office goods, utilities, advertising costs, training courses, company phones, and travel.
If you or your staff are using your own vehicles as “company cars” then you can claim on your and your employee’s mileage at an annual rate of 45p per mile for the first 10,000 miles, then 25p on any additional miles above the threshold.
You can also claim for annual staff parties such as a Christmas party, at a value of up to £150 a head, as a tax-deductible expense for your business.
You best believe that the Nakatomi Corporation wrote off that particular party as an expense.
3. Get the most out of company pension contributions
Pension schemes are especially tax-efficient vehicles. If you’re a business owner and you’ve registered yourself as an employee of said business, you could benefit from a company pension scheme twice over.
Firstly, making contributions as an individual to a pension scheme gives you Income Tax relief.
Secondly, as a business owner, by making employer contributions you will also receive Corporation Tax relief.
A pension isn’t considered a benefit, so you are free of National Insurance liabilities.
You can contribute up to 100% of your earnings within the maximum Annual Allowance of £40,000 a year, although this figure is reduced for anyone earning over £210,000 annually.
A pension can provide short-term relief and long-term gains. You won’t be able to access your pension fund until you’re 55 (rising to 57 in 2028), but once you are you will usually be able to withdraw up to 25% of your pot tax-free.
McClane might not have rushed into danger so readily if he didn’t have that cushy policeman’s pension to fall back on.
4. Use up your Annual Investment Allowance
The Annual Investment Allowance (AIA) lets limited companies claim a percentage of the value of any assets purchased for the business as Corporation Tax relief.
Typically, if you were to buy plant, machinery, or other equipment for the business, you would be able to claim capital allowances for each year your business owns the assets at a Corporation Tax relief rate of 18% of the asset’s value – the respective value decreasing each year by the amount of relief given.
The AIA is currently set at a temporary higher limit of £1,000,000 until 31 March 2023. Under the temporary AIA you can claim 100% of the acquisition cost of any asset in the tax year you purchased it.
Nakatomi might have benefited from investing in some better security options or a corporate panic room. Use your allowances or you might regret it later.
5. Extract profits in the form of dividends
Paying yourself dividends is another great way to extract profit from your business tax-efficiently.
Dividends are not subject to NICs, and you can receive up to £2,000 in dividends before having to pay any tax.
Above the threshold, dividends are taxed at a rate associated with your Income Tax band. According to the government, these are 8.75%, 33.75% and 39.35% respectively for basic-, higher- and additional-rate taxpayers on dividends of up to £37,700 (basic rate), £150,000 (higher rate), and over £150,000 (additional rate).
It is important to note that dividends can only be paid if your company profits are enough to cover them, that these profits will be taxed at the Corporation Tax rate of 19%, and the dividends are added to your total income, which may push your earnings into a higher tax bracket.
However, once everything is taken into account, both Corporation and Dividend Tax are lower than Income Tax rates. So, earning the majority of your income through dividends is likely to be the most tax-efficient option.
Alternative forms of payment can be highly beneficial. Hans Gruber understood that; it’s why he wanted those untraceable bearer bonds.
6. Pay HMRC early and receive associated interest
Once you’ve gone through all your accounting steps and ensured your business is as tax-efficient as possible, you should submit your accounts to HMRC and pay any Corporation Tax promptly.
If you’re late paying your Corporation Tax, you will likely be fined and incur interest on your late payment.
However, if you opt to pay early you can benefit from HMRC paying you interest instead. This is paid at a rate of 0.5% provided you pay before your tax deadline.
The earliest HMRC will pay interest from is six months and 13 days after the start of your accounting period.
At the end of the day, you want to get a drop on them and not the other way round. So, strap that gun to your back and do the unexpected — pay your taxes early!
Get in touch
If you’ve followed through on some of these tax-saving measures, you’ll probably have seen some benefit. Although just like John McClane, the dust might have settled on Nakatomi Plaza, but other challenges might await you in the future.
Fortunately, there are further solutions at your disposal such as benefiting from employing family members, considering employee perks like a share scheme, or calling it a day and selling your business when you’re ready to retire.
The best first step to develop a plan for your business is to contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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