1) Pay Yourself Tax Efficiently
There are three main routes for a business owner to extract profits from their own Ltd company: salary, dividends and pension contributions (although this is taking money from the company for future use). The other alternative is to leave the profit in your company and take the proceeds from the subsequent sale. The key determination on this is the net benefit to the owner in terms of how they structure their payments. Whilst no one likes making payments in tax or national insurance, if you could do this in a way that gives you the most benefit why would you not? Paying tax is not a bad thing if the end result is more money in your pocket, at the time you need it.
Consider how you extract funds from the business. If you trade through a limited company, paying a small salary up to your personal allowance and the rest as dividends from your profits will save some tax and national insurance but needs monitoring on a regular basis. You may pay no income tax or National Insurance Contributions at all on your salary if it falls below the current threshold. The amount of salary that you take should be monitored to ensure this does not impact on the level of state benefits that you are entitled to in retirement.
It may also be beneficial to pay your spouse or family member for the work they undertake, dependent upon their other income.
There isn’t a one size fits all policy for remunerating yourself. Those who operate as partnerships will need to take care with the allocation of taxable profits between each partner and those who operate a limited company will need to take care with the mix and timing of salary and dividends. The personal circumstances of each taxpayer need to be considered carefully in advance of the end of the tax year.
2) Pension Contributions Through The Business
Don’t mistake your business for your pension, especially as a pension is often the most tax-efficient way to draw cash from your business. Your future should be financial independent of your business, not financially dependent on it.
If possible, don’t restrict yourself to making an ‘employee’ contribution from your post-tax income when ‘employer’ contributions can be made. It’s often much more efficient for your company to make employer pension contributions. Pension contributions do not suffer corporation tax or NI when these are made from the business, and when the benefits are taken 25% is usually tax free and thereafter taxed at marginal rates with no NI to pay.
Your company can usually contribute up to £40,000 a year (gross) to your pension and receive corporation tax relief – regardless of your actual salary – and even make use of any previously unused allowance from the last three years through ‘carry forward’.
Companies making contributions on behalf of their employees and directors will also save Corporation Tax at 19%.
3) Business Protection Planning
Every successful business has a strategy and a plan for the future and while this almost certainly takes into account the growth and direction of the company, it should also include business protection too. Although no-one expects to encounter problems when they start a business, this does not mean that they will not arise at some point in the future so planning for them is essential.
Business continuity and succession planning may not be high on the priority list of many businesses. However, losing a key employee could have a devastating effect financially on a business. And while business succession planning is a key part in protecting the stability and continuity of a business, frequently little or no consideration is given to this planning.
Consideration should be given to:
- Key Person Cover
Provides a financial safety net if a key member of staff dies or is diagnosed with a serious illness (if Critical Illness Cover is also selected). The claim is paid directly to the company or partners, allowing breathing space to help keep the business trading as normally as possible.
- Relevant Life Cover
Allows companies to offer a death-in-service benefit to its employees (including salaried directors). It’s set up by the company and pays out a tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured.
- Shareholder and Partnership Protection
Helps business owners keep control of the company if one of them dies or is diagnosed with a critical illness.
4) Corporate Investment
Many small business owners invest their assets back into their own business. However, this increases the level of risk. You may wish to consider investing outside of your industry to diversify your investments and spread the level of risk. You also have the potential to achieve a better investment return than leaving retained profits in cash.
5) Business Succession Planning
You should have a business succession plan or exit strategy in place for your business. You may not want to think about the possibility that you could leave your business but it is important to have a succession plan in place for when you do leave the company. A succession plan will enable a smooth transition in leadership and address financial and tax planning.