A little light at the end of the tunnel
A little light at the end of the tunnel
Work hard and reap the benefits of tax

At the end of January, tax is probably on your mind more than usual. It’s tempting, as HMRC continues its inexorable attack on your wealth, to feel downhearted. I want to sound a more cheery note and say that despite the tightening screw there’s still plenty you can do to protect your wealth strategically, as long as you stick to three-pointers.

The limited company remains a beautiful mechanism, even though it has been assaulted as much as any other tool in the mid-earning entrepreneur’s toolbox. HMRC increased the tax burden of operating through a limited company, just as it restricted the mortgage interest that can be claimed on rental properties. Prior to 2016 a husband and wife could extract £80k a year from their limited company with no personal tax, so incorporating was a no brainer

The type of people who become our clients — business owners who are about to step up a gear — often look back to those days and tell me they think it’s not worth incorporating any more. I tell them it is but you have to work harder. Here are the reasons why it is and why you have to work harder, so when you are deep in the paperwork you will be able to remember what it’s all for.

1. A sole trader earning £100k pays tax on £100k. Instead, if you get the structure of your business right, you can harness tax savings — but only a limited company gives you that flexibility. There’s no point having flexibility unless you use it because it costs more to maintain. All the options below become real once you tip into the higher rate as a sole trader. With a limited company, you acquire the option of not going into the higher tax rate, assuming you don’t need more than £50k to live off.

2. The beauty of a limited company structure is that you pay tax in two tiers. The company itself initially pays tax at a rate of 19%. Then you personally pay more tax as you take funds out of the company in the form of dividends. That’s where savings come into play: you can choose to withdraw a tax-efficient amount, or extract it all. There’s a sweet spot, meaning a husband and wife can extract £100k at a tax-efficient rate, then save 32.5% by leaving the remaining funds in their company. If they do this their tax rate will be 25% overall, combining the dividend tax at 7.5% with the corporation tax at 19%.

The funds that remain in the company are available to use tax-free. This is good for associates, who can extract what they need to live on, save tax-free, then buy a practice tax-free. You can do anything with the accumulated funds, buy a rental property and use it as a pension, build or renovate or develop, or if you’re retiring you can drip feed the funds out to pay low or no tax.

3. Once you set off down this path there can’t be any surprises. We do personal budgets with clients, looking at how much they spend on their mortgage, pension, and other bills. We find things they’re paying for from their personal funds which the company can take on instead, so we begin by setting up their company in the most advantageous way possible. Your company can pay directly into your pension as a company expense, and pensions aren’t taxed. That’s very efficient. Your company can also buy Bitcoin and some life assurance without tax.

We create a monthly or quarterly plan so you draw an agreed sum, say £100k, over the year, and then we monitor. I’ve reached this stage with people when all of a sudden there’s a new source of income, so they tip over into £120k, which costs them 60% in tax. Make sure you communicate with your accountant to avoid this. Your strategy needs to be working in real-time (it’s a criminal offence to backdate paperwork), so you must have foresight, work harder and pay more attention to get the tax savings.

We’re here to help you build your bespoke tax strategy and save thousands.

Hayley Robins
By Hayley Robins Senior Accountant
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