When I was a practicing Chartered Accountant, the most asked question was probably “How do I save Tax?”
No one likes to pay tax, but it is a necessary evil of any modern society and if we want to have the luxuary of safe roads, an NHS service, a police force and our bins collected each week, as just a few examples, then tax is needed to pay for all that.
However, there is nothing wrong in trying to save tax where you can and to try and avoid tax, but not to evade tax! To put the record straight avoidance is legal whereas evasion will get you into trouble!
Dealing with a limited company within the UK, as these are the rules that I know, then there are probably four ways to get money from your business – each of which can be more or less tax efficient.
1. Salary – quite simple, you can vote yourself a salary on a monthly basis and the company will pay the tax and National Insurance (NI) on this for you. The company will deduct both tax and NI from your gross salary and pay you the net amount and the company will also have to pay over company NI too. Therefore, this method of payment is not so tax efficent, however the salary is tax deductible, as far as the company is concerned.
2. Benefits in kind – Another way to receive remuneration from your company is to provide yourself with certain perks. For example, a company car, a mobile phone, a holiday villa and private medical insurance to name a few. You will be taxed on the benefit in kind and the UK Government has a method of calculating just how much you should be taxed. For example, company cars are taxed dependent upon the value when new and on how fuel efficient they are. So the more the cost when new and the less fuel efficient they are the more you will be taxed! in a nut shell! The way I see things is that if you buy a relatively fuel efficient car, that is not too expensive (say less than £20,000) and you do not do too many business miles, then a company car is the way to go. However, there are so many permutations for this and you will need to look at your own personal circumstances and the car you are looking to buy.
3. Dividend – I would argue that dividends are quite tax efficient, as neither the company nor the individual pays NI on a dividend. However, dividends are not tax deductible for the company, so the company will pay Corporation Tax on these profits distributed as a dividend. The effective rate of tax on a dividend for 40% tax payers is only 25% though, which has to be good. And for those who remain below the 40% threshold, there is no tax to be paid on a dividend.
4. Capital distribution – Probably the most tax efficient way to be paid is by building up the value of your company, without drawing out too much by way of payment using the above 3 methods. Then put you business onto the open market and sell it to the highest bidder! In these circumstances you will pay Capital Gains Tax (CGT) on the gain you make on the sale – the present legislation in the UK is as follows:
The relief will take effect from 6 April 2008 alongside the CGT reform programme announced at the Pre-Budget Report.
The relief will be available in respect of:
gains made on the disposal of all or part of a business, or
gains made on disposals of assets following the cessation of a business
by certain individuals who were involved in running the business.
The first £1 million of gains that qualify for relief will be charged to CGT at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.
An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for relief.”
So if you have a gain of less than £1million then you will only pay £100,000! whereas if you had drawn a dividend of £1million the tax would have been £250,000! And to receive a net salary of £900,000 (i.e. the total gain of £1m less the CGT of £100,000) the tax and national insurance paid on this would be a whole lot more, bearing in mind the 40% threshold is presently just of £40,000! So the majority of the £900,000 would be taxed at 40%, which is ignoring the employees NI, not to mention the Employers NI!
Further more, if you are prepared to emigrate before you make the sale you could potentially pay zero tax! Be careful where you emigrate to, as you don’t want to jump out of the fying pan and into the fire! For example, in the Isle of Man they do not have CGT so you would pay no tax on the business sale!
Before you do anything describe above I would recommend that you speak with your accountant or tax adviser!