Effective tax strategies for business owners
If you are a director of a limited company you are in a unique position to balance personal and company needs and you have the flexibility to considerably reduce your tax bills. Now, especially with the introduction of the top 50% tax rate, proactive tax planning can save a significant amount of money.
We support business owners and company directors to significantly cut their tax bills. During our tax planning review, our tax specialists examine your personal and financial situation to understand how you might be able to reduce both your personal tax rate and your company’s corporation tax rate.
Navigating the UK’s increasingly complex tax system
For those on six-figure incomes, equalisation of income between spouses is increasingly being regarded a key tax planning strategy. This is because changes to the tax system have created such a wide range of tax rates - from 10% to 60% - depending on your income bracket.
For example higher income taxpayers incur the following tax rates:
Income levels and their effective tax rates
- £37,400 and £100,000 – 40% tax rate
- £100,001 and £113,000 – 60% tax rate
- £113,000 and £150,000 – 40% tax rate
- £150,000 and above – 50% tax rate.
A large proportion of higher rate taxpayers unwittingly fall within the 60% tax bracket. This occurs because the entitlement to a personal allowance is reduced by £1 for every £2 by which income exceeds £100,000, until it is lost altogether when income levels reach £113,000. The effect of this is that income within this band incurs a disproportionately high rate of tax. It is therefore very tax efficient, if your income falls within this bracket, to seek ways to reduce it. This might involve income equalisation, pension contributions or gift-aid donations for example.
Shareholder directors in owner-managed companies in particular can benefit from a good deal of flexibility over the level and type of their income, by combining salary, dividends, benefits in kind with the careful use of their director’s loan account.
Whatever your situation, tax planning can identify the optimum way to structure your financial affairs and legally reduce your taxable income to avoid incurring the highest tax rates.
As the example below illustrates, this approach makes a very concrete difference between incurring tax unnecessarily and paying the legal minimum.
Mr Evans has a successful business and receives a salary and dividends from his company, together with significant investment income in the form of rental profits and interest. His total income is £175,000 per annum - his income between £100,000 and £113,000 is taxed at 60% because at this level he forfeits his entitlement to the £6,475 annual personal allowance, and his income in excess of £150,000 is taxed at 50%.
His wife Elaine is also a director and employed part time by the business. She takes an annual salary of £20,000, of which £6,475 is covered by her personal allowance and £13,525 is taxed at 20%.
There are several ways in which Mr & Mrs Evans can equalise their income, and by doing this, they are able to obtain a tax saving of £10,000 every year - or looked at another way, increase their net income by £830 a month.
In effect, tax planning enables the couple to move £80,000 of their joint incomes into the lower 20% and 40% tax rate bands.
To find out more about RJP’s holistic tax planning services for company directors, contact Lesley Stalker - las@rjp.co.uk
We provide a free initial consultation on a no obligation basis.
