Ahead of the end of the tax year, business owners and entrepreneurs need to ensure that they are doing everything they can to help achieve their business and personal goals. The key to this is maximising the profits of the business so it can provide for the owners and their families.
We have outlined simple but effective ways to help business owners make the most of their hard earned profits.
For the business
Business owners should consider the timing for expenditure before the year-end of the business, particularly for things like capital expenditure and company pension contributions.
However if the tax year-end is used as trigger point, business owners can be ahead of the game and plan in advance. Points to think about are:
- Capital expenditure: has the business used its annual investment allowance (currently £200,000)? With a 100% tax deduction this is very attractive so purchases should be timed carefully to make the most of it.
- Pension contributions: directors and employees may be looking to top up their contributions pre-5 April and contributing via the company is an efficient way of doing this. Salary sacrifice can still be used for pension arrangements but remember they must be in place before the contribution is made.
- Employee benefits: people are the main asset of any business. If business owners are thinking of incentivising their employees, pre-5 April may be a good time to do this ready for the new tax year.
For the business owner
Once the business is in good working order, business owners should consider how they can extract their profits efficiently. This can be done in a number of ways including:
- Making use of the different rate bands: planning income withdrawal to make sure business owners are not falling within the more expensive tax bands is a simple way of saving tax. Remember the band between £100,000 and £123,000 has an effective tax rate of 60% so should be avoided if possible.
- Balancing income between family members: if family members are shareholders or work in the business their allowances and reliefs can also be maximised.
- Dividend vs salary: despite the increase in dividend tax rates it is still cheaper to draw profits via dividend rather than salary.
- Using the dividend allowance: the £5,000 tax free dividend allowance will be reduced from 5 April 2018 so make sure it is used.
- Maximising pension contributions: employer contributions are very efficient and personal contributions can help mitigate the 60% band above.
- Making tax efficient investments: mitigate liabilities still further by making tax efficient investments such as investing in companies via the Enterprise Investment Scheme.
Simple planning techniques can ensure you are able to enjoy the profits of the business now without the tax being too painful.
It is also important to plan ahead. Too often business owners have not thought about a succession plan and whether this involves their families, employees or sale it is crucial to have the structure of the business right to maximise any opportunity that may arise.
If you would like to learn more about the planning opportunities available for entrepreneurs and business owners please contact your local Crowe contact.