Taxation has been woven into the fabric of our community since the first city states flourished in old Sumer. Whilst salaried workers can often do nothing about their tax liabilities, company owners can rehearsal choice in the way they passage wealth to minimise their tax liabilities.
What follows is a summary of a wonderful 2,500 word pdf with graphs that expands upon the issues outlined mentioned below. Visit our website for this and much more.
Director's loan
A director could use a loan to passage wealth from the company and either repay it in full or may be able to use manifold loans & repayments to build up a equilibrium over time without tax. However, if its not done correctly 25% of tax may be due on the excellent loan balance. Also, if the director's loan is written off, it'll be chargeable as dividend income and is likely to attract class 1 Ni, so isn't very productive to write off.
Salary vs dividends
Salary costs more in tax than using dividends, mainly as dividends don't involve national guarnatee contributions. This is true at all levels, but especially between the £30k - £50k behalf level for proportion of profits spent on tax.
It may also be potential to use distinct share classes to pay dividends in distinct ratios to the actual shareholdings. Although need to consider if shares will need voting/capital rights, e.g. To shift income to spouse.
To get the full tax benefits for either salary or dividends there are a whole of key points to note. These comprise paying salary within 9 months of the year end and ensuring adequate paperwork is in place to support the salary. Dividends wish a adequate level of profits to avoid being illegal and wish board resolution and minutes.
Salary and dividend strategies should be reviewed prior to the company's year end and also before the tax year end of 5 April, to accomplish tax planning and to get the right paperwork in place in time.
Management fees / overseas
Rather than using wages or dividends it may potential for the owners to charge administration fees to another loss development Uk company.
If the owners are domiciled overseas they may also be able to shift income by paying administration fees to an overseas company in a low tax jurisdiction.
Care needs to be taken to ensure the fees are justifiable and that any overseas company is managed and controlled overseas and be able to furnish Hmrc with supporting evidence such as email/call logs & passport stamps.
Capital route
Rather than extracting too much wealth in the short term, the profits could be re-invested in the company with the aim of expanding its value in the long term to make a bigger behalf on exit. Capital gains tax of 10% would be lower than either salary or dividends for the first £10m of capital gains in a lifetime if the criteria for Entrepreneurs Relief are met. It also needs a genuine disposal transaction with a industrial justification.
Other points
A director could also use benefits such as medical guarnatee or company cars to passage wealth. This could potentially save on employee's Ni compared to salary, but need to check the calculations for the tax efficiency of a single advantage due to differences in how they're calculated.
Pensions are a complicated area and there are many other venture considerations, but from a tax perspective, pensions are extremely tax productive as a director could derive tax relief at the full marginal rate on contributions up to £50k.
The above consulation has simplified things to enable comparisons. However, it should be noted that behalf is not the same as cash and a company could make lots of behalf but be cash poor. So a company should keep adequate cash in the company to fulfil its working capital requirements and a contingency should also be kept for a "rainy day".
Disclaimer
The above is not intended to constitute legal, financial, tax or other advice, and should not be relied on or treated as a substitute for definite advice relevant to single circumstances. We shall accept no accountability for any errors, omissions or misleading statements in the above, or for any loss which may arise from trust on materials contained in the above.
master Tax Guide to Wealth discharge Strategies