Despite the increased rate of taxation, running your own business can still be very rewarding, provided the right structures are in place. Here we discuss some options to help Owner Managed Businesses (OMBs) remain profitable and increase their net worth:
From April 2016 the notional tax credit on dividends will be abolished. If you have been using a high dividend and low salary strategy you should review this urgently, as you may have a much higher tax bill.
Pay yourself only £5,000 in dividends and this will be tax free. Anything over this will be taxed at 7.5% if you are a basic rate taxpayer.
Consider transferring shares to your spouse and adult children, as they will each have a £5,000 tax free allowance for dividends.
You could also consider declaring a larger dividend in 2015/16 and crediting this to your director’s loan account. In 2016/17 you can then draw down on this without incurring tax.
Investing into a pension is still very tax efficient provided you stay within the limits.
Currently you can invest up to £40,000 a year into your pension, but from 6th April 2016 the limit could be as low as £10,000, depending on your total income for the year.
Make sure you take proper advice from a financial adviser if you plan to include pension investment as part of your 2016 tax planning strategy. Also have your accountant confirm that the size of pension contribution you are considering should be accepted by HMRC as “for the purpose of the trade”.
Loan Account Strategy
Consider charging your company interest on any loans you make to it, as this is more tax efficient than either salary or bonuses. It will even be completely tax free if your non-savings income is less than £16,000 and the interest is £5,000 or less.
It may seem obvious, but don’t forget to have the company pay back some or all of the loan in preference to paying you a salary. There is no tax on a loan repayment.
You can still take loans from your company tax free as long as you manage this carefully. The total loan should not exceed £10,000 and must be paid back within the first 9 months of your company year. You must not then take a further loan within the following 30 days. Liaise with your tax adviser to make sure you do not fall foul of the rules.
Employment Allowance Strategy
The Employment Allowance for National Insurance is due to increase from £2,000 to £3,000 in April 2016. In other words, you will be able to reduce your National Insurance bill by up to £3,000.
There is a trap however. From April 2016 the Employment Allowance will no longer be available if there is only one director employed by the company with a salary above £5,824.
One way around this trap would be to employ one other person. This may, for example, be your spouse. Make sure this person genuinely works for the company and that HMRC cannot argue you only employed her (or him) in order to get around the changes in Employment Allowance rules.
Car Ownership Strategy
Tax policy on company cars is intended to discourage company car ownership. But it is not always the case that it is more tax efficient to own your car personally, especially in the case of low emission vehicles. You may also consider having your company provide a low emission car to your spouse or children. Speak to your adviser and ask them to check whether personal ownership, company ownership or a lease arrangement is the most tax efficient for you.
The corporate tax landscape has undergone some dramatic developments over the last few years and it continues to do so. This means that targeted advice based on a comprehensive understanding of clients’ businesses and the tax rules which affect them is essential. At Beavis Morgan, we have extensive experience of providing specialist tax advice and planning to OMBs.