Tax often receives a negative perception, but it shouldn’t. It’s about understanding the tax rules and systems and using them to your best advantage. So, what do mean by tax planning?
Business Tax Planning
Effective tax planning is important for your business if you are aiming to maximise profits, ensure compliance, and prepare for sustainable growth. One of the first areas to evaluate is your business structure.
Whether you’re operating as a sole trader, partnership, limited company, or LLP, each has different tax implications. Choosing the best option depends on your tax situation and other factors, such as business risks and liabilities.
Timing of income and expenses is another critical area. You can legally reduce your tax liability by bringing forward allowable expenses or deferring income. Make full use of capital allowances, especially under schemes like the Annual Investment Allowance or full expensing for qualifying assets.
It’s also important to look at remuneration strategies. For directors and shareholders of limited companies, combining a low salary with dividends can be a tax-efficient way to extract income. Even with the recent changes in the Employer’s National Insurance, it remains the case.
Don’t forget about pensions because contributions made by the company into a director’s pension are usually deductible for Corporation Tax purposes and don’t incur National Insurance.
Keeping accurate records, working with a qualified accountant, and staying up to date with HMRC changes are all key parts of a solid tax planning strategy. If you want to know more get in touch with us by emailing enquiries@myersclark.co.uk or have a look at how we can help you feel calm about your taxes.
How Small Business Directors Can Take Money Out of Their Company
For directors of small UK limited companies, withdrawing money from the business needs to be done carefully to stay compliant and minimise personal tax. The most common methods are through salary, dividends, and expenses. Normally it is combination of all three.
- Salary
Directors can pay themselves a salary through Pay As You Earn (PAYE). A common strategy is to pay a salary just above the Lower Earnings Limit but below the threshold where employee and employer National Insurance kicks which is currently £12,570, depending on the circumstances.
This allows the director to maintain eligibility for state benefits without paying tax or National Insurance (NIC)
- Dividends
After paying Corporation Tax on profits, the company can distribute the remaining profits to shareholders in the form of dividends.
Dividends are not a business expense and must be paid from post-tax profits. For directors who are also shareholders, this is often a very tax-efficient way to take income.
- Reimbursing Expenses
If a director incurs business-related expenses personally (e.g., travel, office supplies), these can be reimbursed by the company, tax-free, as long as they’re “wholly and exclusively” for business purposes. Keeping detailed records is essential here.
- Pension Contributions
The company can make contributions into a director’s pension scheme. These are deductible for Corporation Tax purposes and don’t attract NIC or Income Tax (within the annual allowance), making them a very efficient form of remuneration.
- Director’s Loan Account
If a director lends money to the company, they can be repaid tax-free. However, if a director takes more money out than they’ve put in (an overdrawn loan account), this can have tax consequences, including a 33.75% Section 455 tax charge on the company, and potential benefit-in-kind charges.
Personal Tax Planning
Smart tax planning isn’t just for businesses; individuals can also benefit hugely from understanding how UK taxes work and how to legally reduce their liabilities across different areas. What do we mean by tax planning when it comes to your personal tax position?
· Income Tax
Start by using your personal allowance which is currently £12,570.
If you’re married or in a civil partnership, consider the Marriage Allowance, which lets one partner transfer up to £1,260 of their personal allowance to the other if they earn less than the threshold.
Use ISAs to shelter savings and investments from tax—interest, dividends, and gains within ISAs are completely tax-free. Also, consider salary sacrifice schemes for pensions or benefits like electric cars and cycle-to-work schemes, which reduce your taxable income.
For higher earners, be aware of tax tapering once your income exceeds £100,000, which can lead to an effective 60% tax rate. Making pension contributions or charitable donations can help reduce your taxable income and reclaim lost allowances.
· Capital Gains Tax (CGT)
CGT is charged on the profit when you sell or dispose of certain assets like shares, second homes, or valuable possessions. The annual CGT exemption is now just £3,000, so it’s more important than ever to plan.
· Inheritance Tax (IHT)
IHT is usually charged at 40% on estates over £325,000 (the nil-rate band), but there’s also a residence nil-rate band that can increase this threshold to £500,000 when passing a home to direct descendants.
Some key planning tools include:
- Using gifting allowances (e.g., £3,000 per year, small gifts, wedding gifts).
- Potentially exempt transfers (PETs)—gifts made more than 7 years before death are typically IHT-free.
- Putting life insurance policies in trust, so they fall outside your estate.
- Using trusts to structure wealth outside of your estate (with professional advice).
We are serious about you and your ambitions. We are trained accountants who work with a variety of businesses and individuals, including the self-employed and landlords. We can discuss all the above tax planning options for you and your business. Speak to your normal manager, who will be happy to assist you.
If you are not yet working with us, here’s how we work. We have a track record of working with clients to achieve the optimum position when it comes to tax. If you are not receiving the right advice now, it might be time to consider a new approach. Here’s what we mean by tax planning.