The top rate of personal income tax in the UK is currently 45%, so finding the most tax-efficient way of take profits from your business can make a big difference to how much tax you will pay.
Here are some of the things that you can consider:
Deciding whether your business should be a limited company, a limited liability partnership (LLP), a partnership, or whether you should operate as a sole trader will make a difference to your tax position. As your business grows it can be beneficial to change, so regular reviews are a good idea.
Research and development
You can claim an additional 125% on qualifying research and development (R&D) costs for projects that lead to advances in science or technology. The definition is quite wide, and you could be eligible for enhanced tax deductions.
Family tax planning
Family-owned businesses can be structured to maximise the tax relief available. This is also an important point if you’re planning to hand over the business to the next generation or are thinking of selling to the management team.
Business Property Relief (BPR)
Sole traders, partners or shareholders in private companies can use BPR to reduce or remove the value of a business from inheritance tax, either as lifetime gifts or when they die.
When selling shares of all or part of a business, gains made on qualifying business assets can have a much lower effective tax rate, subject to certain conditions.
If you have business losses, you should take advice about how to claim them in the most efficient way. For example, they can be offset against your previous year’s profits, or next year’s profits.
Profits and cash extraction
For directors and shareholders there are several options, including taking dividends instead of salary, company contributions to a pension and receiving tax efficient benefits.
Planning when to take dividends and allocate expenses can also help you to run your business and manage your tax obligations.
Staff incentives – Share options for employees such as Enterprise Management Incentives (EMI) can be very tax-efficient and are a good incentive for your key employees.
Pension contributions are tax efficient for employers, employees and directors. Up to certain limits, corporation tax relief applies to company contributions to an employee’s pension, which will also be free of income tax and national insurance (NI).
Individuals can also claim relief from income tax and national insurance for contributions to personal pension schemes.
You can claim capital allowances when you buy tools to use in your business, company vehicles, equipment and machinery, for example. You can deduct some or all of the cost of these items from your profits before paying tax. You can invest up to £200,000 in capital assets and offset these against your tax bill, known as the Annual Investment Allowance (AIA).
Sole traders can claim a capital allowance as part of their tax return.
Partners can claim through a partnership tax return and limited companies can use a company tax return.
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