One of the main issues profitable limited companies face is how to extract money from the business in a tax-efficient manner.
For most people, moving to a tax haven is impractical, despite the lure of the sunshine! Meanwhile, the tactics employed by some high-profile, larger corporations are probably beyond the scope of many normal business owners and might leave a sour taste in the mouth, anyway.
So, the question remains: How can business owners extract profit from their business in a tax-efficient way?
Salary and dividends
Most limited company owners will split their renumeration between salary and dividends. Many will take a salary up to the Personal Allowance (which is currently £11,850) and dividends thereafter. While the recently-introduced and amended Dividend Tax has reduced the tax-efficiency of taking dividends, it remains the most efficient method of making withdrawals from business capital and is still employed by most limited company shareholders and directors.
However, you may want to find other ways of withdrawing capital; enter the humble pension.
Over the years, pensions have naturally been used to provide an income in retirement, and that remains their main purpose. However, flexibility has increased since the introduction of Pension Freedoms in 2015 and subsequent amendments to rules around how pensions can be passed on after death. These now mean they are increasingly attractive for business owners as a way of extracting profits tax-efficiently from businesses and passing on wealth to family or good causes upon death.
So, how does it work?
Simply put, pension contributions are deemed to be an expense for the business, reducing the net profit and consequently lowering the tax payable.
The money can be paid into a pension of the business owners choosing. If a pension with self-investment capabilities is chosen, such as a SIPP (Self-Invested Personal Pension) or a SSAS (Small Self-Administered Scheme) the money could be used to help the business. For example, it could be used to purchase premises or, in the case of a SSAS; assuming certain criteria are met, it can be loaned back into the company.
A Pension Freedoms boost
The introduction of Pension Freedoms in 2015 removed the restrictions on the amount which people can withdraw from their pensions. While you still need to be at least 55 to access the capital in your pension, the amount you can withdraw each year is no longer limited. This provides scope to mould withdrawals to your requirements. Furthermore, subject to potential income tax charges, the value of the pension can now be left to nominated beneficiaries after your death.
For all these reasons, business owners are rightly now taking another look at pensions. If you can accept the age restrictions, they can make an ideal way of transferring capital out of your business in a tax-efficient way. While in the meantime, potentially helping your business, creating an income when you retire and leaving a legacy when you’re gone.
For more information, or to discuss your options as a business owner, contact us on 02380 633377 or request a call back by clicking here.