Business owners are in the unique situation of being able to manage how much tax they pay personally. Not so the case for most non business owning employees.
1. Make sure you use the right combination of salary, dividends and director loan account payments
As a business owner you are in the best position to choose how you pay yourself through salary, dividends, bonuses and directors loans. You can reduce your NI contributions by paying yourself dividends. However you can also reduce your personal income tax by paying yourself from the directors loan account. The company must have the funds to do this – at least on paper.
2. Consider further pension contributions
I know this is not a hugely popular choice, however the tax benefits should not be over looked. Firstly you will get tax relief against your contributions and secondly, the fund growth is free of Capital Gains Tax. Contributions next year are likely to be capped at £50,000, so contributions should be made in this tax year if you wish to invest more. Furthermore, and this is often overlooked, none of us want to work forever and pensions should be considered when deciding how you are going to live once you retire.
3. Consider using your annual ISA Allowance
The annual ISA for 2010/2011 is £10,200 per person, so a husband and wife can invest £20,400 this year. The advantage is that there is no CGT on any profits made and additionally there is no need for the information to be included on your tax return. This is a great way to build up medium to long terms funds that are tax free and readily available.
4. Consider the timing of the sale of assets subject to capital gains tax (CGT)
We all have an annual allowance for CGT (£10,100 each), so your wife has the same allowance as well. If you do not use your allowance each year, then you will lose it. And don’t forget Entrepreneurs Relief up to £2million – gains up to this amount are taxed at 10%.
5. Minimizing the aggregate family tax bill
If it possible, structure your financial affairs so that you use all your allowances. Within reason you can structure your income between you and your wife to efficiently pay reduced income tax. You should also use both CGT allowances if you can. Also if you have income producing assets in may be better to transfer these assets to a non tax payer.
6. Tax efficient borrowing
From a tax efficiency view point it is better to borrow again a commercial business asset rather than personally. Business loans are business expenses like all others and are treated as business expense. Not so for personal debt, whether it’s a mortgage or a personal loan.
7. Consider IHT-free gifts.
The annual gift exemption is £3,000 per person. So each year a married couple can gift away £6,000 in total and there will be no tax implications. This can be very useful when helping fund private education for grandchildren.
This is not an exhaustive list of potential tax planning opportunities. Always take professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.