Profits for business owners and their families

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 a trigger point, business owners can be ahead of the game and plan in advance. Points to think about are below.

• Capital expenditure: has the business used its annual investment allowance of £1 million per year? The rules can be complex, 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. Further considerations for the individuals' 'annual allowance' should be made ahead of making any pension contributions. 
• 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.
• Electric cars: it’s a good time to invest in an electric car in the business. Benefit-in-kind rates for fully electric cars are 3% in the current tax year (increasing by 1% annually until 2027), and hybrid vehicles will also see a reduction depending on their electric range. At the time of writing, 100% tax relief is available for electric cars that have CO² emissions of 0 g/km under the 'First Year Allowances' regime.

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.

• 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 £125,000 has an effective tax rate of 60%, so it 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: there is still a £500 tax-free dividend allowance, 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. With the position on Business Asset Disposal Relief and Inheritance Tax very much in the headlines at the moment, it is more important than ever to plan ahead.

If you would like to learn more about the planning opportunities available for entrepreneurs and business owners, please contact your local Crowe contact.