Tax advice small business owner

[markb]

Hi, I've just learnt I now have to pay 32.5% tax on any money I take out of my company over the standard amount I pay myself. This used to be 25% last year.

So now my business has to pay 20% corperation tax, plus the 32.5% tax if I want to take a large sum from my company.

This is so frustrating, but I know some people will say it's a nice problem to have.

Does anyone have any good advice at getting money out of your company without paying as much tax?

I also just learnt that when I took out £100k out of my company a couple of years ago, I had to pay £25k tax, but then a year later I had to pay 25% tax on the £25k tax I paid. So now I'm getting taxed on my tax.

 

[Edwin]

It only really helps if you're selling the whole company, but it's worth taking a quick peek at https://www.gov.uk/entrepreneurs-relief/eligibility to find out about Entrepreneurs Relief.

(If you are selling a company then under certain conditions only 10% will be owed total)

But of course that doesn't affect day to day taxation. It is, however, one reason to consider separating major projects that have the potential to be sold for a decent chunk of change in the future off into completely separate companies (though of course that has accounting/filing consequences and incurs costs) because after they've been running for the minimum time to qualify you can then sell them off and claim Entrepreneurs Relief.

 

[monaghan]

If you are paying that much tax, then the cost of a good accountant sounds like a good investment

 

[bonusmedia]

This comes into force in April, you can take dividends at the old rate until then

 

[Admin]

Sounds like you can afford to upgrade your Acorn account . Tax is a $%^&*!

 

[BG]

PM on its way Mark...

 

[markb]

This comes into force in April, you can take dividends at the old rate until then

Yes, that's what my accountant has advised, to take a chunk of cash out now so I only get charged at the 25% rate.

(If you are selling a company then under certain conditions only 10% will be owed total)

Edwin, yes I am aware of this but i'm not selling my company yet. Also, you cant close a company, and re-open a similar one to get around this. My accountant also said that I need to keep taking money out of my business because if I keep too much in my account, the government will class it as an investment company and then charge me more tax.

 

[pberry4032]

You only need to vote the dividend in this tax year to get the lower rate, you can actually leave the money in the company and draw down as you need it over multiple years.

Also look at EIS, Enterprise Investment Schemes as these can reduce inheritance tax and CGT liabilities.

Use a partner, if you have one, to get their allowances worth out of the company.

 

[markb]

You only need to vote the dividend in this tax year to get the lower rate, you can actually leave the money in the company and draw down as you need it over multiple years.

Also look at EIS, Enterprise Investment Schemes as these can reduce inheritance tax and CGT liabilities.

Use a partner, if you have one, to get their allowances worth out of the company.

Thanks for the advice, I may take more out in a dividend this year but leave it in the company. My partner is joint director so we do take our full allowance out of the company each year.

 

[pberry4032]

Thanks for the advice, I may take more out in a dividend this year but leave it in the company. My partner is joint director so we do take our full allowance out of the company each year.

No worries. I've been in seminars all week with our accountants talking exactly this!

 

[markb]

My accountant did advice that I could pay a lot of our money in to a pension, and then when I turn 55 I can draw 25% out tax free. Which sounds good, but i'm not turning 55 anytime soon and my money would be tied up until then.

 

[pberry4032]

My accountant did advice that I could pay a lot of our money in to a pension, and then when I turn 55 I can draw 25% out tax free. Which sounds good, but i'm not turning 55 anytime soon and my money would be tied up until then.

Yes currently you can pay up to £40k a year into a pension although this may change. Also you'll get relief on that so a top up from the government.

This all may change in the budget though, it's on BBC today and we were warned about it.

 

[bonusmedia]

I'm looking at the pension option at the moment, some people seem to be saying the £40k limit applies to salary and not dividends though? I take most of my income as dividends so may not help much

 

[pberry4032]

I'm looking at the pension option at the moment, some people seem to be saying the £40k limit applies to salary and not dividends though? I take most of my income as dividends so may not help much

But a pension would be taken through PAYE as salary sacrifice. It wouldn't come out of a dividend.

We were also told this week that taking a pension extends your basic rate tax rate so the way I understand it, if you currently have £10k basic rate allowance and you pay £40k pension, you'd now have £50k basic rate tax allowance.

 

[gimpydog]

But a pension would be taken through PAYE as salary sacrifice. It wouldn't come out of a dividend.

Or you can make the pension contribution from taxed income & claim it back. That is, you pay the pension contribution personally, rather than the company paying it.

 

[bonusmedia]

From what I've read, the tax relief is available up to 100% of annual earnings with cap of £40K but this does not include dividend.

I take salary up to the NIC limit and the rest as dividends, so my 'annual earnings' for this purpose aren't much.

I may have this wrong though? Looks like I'm going to have to get some professional advice, my accountant has suggested an IFA

 

[bonusmedia]

But a pension would be taken through PAYE as salary sacrifice. It wouldn't come out of a dividend.

We were also told this week that taking a pension extends your basic rate tax rate so the way I understand it, if you currently have £10k basic rate allowance and you pay £40k pension, you'd now have £50k basic rate tax allowance.

Ah this may explain where I've got it wrong

 

[pberry4032]

An example, at the moment my PAYE wage is £850 per month. The rest is dividends.

This keeps me in stamps for NI but I don't pay any tax. I also have salary sacrifice for childcare.

I've got some slides I can email you on what we did this week? Got some good examples of pay including breakdown of wages and dividends, more so tailored for the new rules due in April with dividends.

If you PM me your email address is be happy to send them over.

I would have thought your accountant should be doing this not an IFA??

 

[bonusmedia]

Much appreciated, will PM

 

[Edwin]

Re. pensions and dividends, this sounded interesting...
http://www.cardens.co.uk/dividends-and-pension-contributions/

Of course, they're trying to sign up clients so they don't spell out the detail (and I don't blame them) but the line of reasoning itself is worth a look.