Over the next few weeks will be sharing blogs from our wonderful guest blogger Sarah Quirk of SarahQuirk Wealth Services. This week Sarah shares her expert knowledge on how as a business owner you can improve your personal wealth in 2021.
This article covers the following three areas to consider:
- The best way to take profits from your business
- Employing family members
1. The best way to take profits from your business
The best way to take profits from the business for your own benefit is about finding a tax-efficient blend of salary, bonus and dividends.
▶︎ Your Salary
- When deciding the level of salary, there are various factors to consider, including Income Tax and National Insurance contribution (NIC) thresholds.
- The Income Tax Personal Allowance is currently £12,500 and the threshold for NIC is £8,632.
- It’s often a good idea to keep your salary just above the threshold for NICs as this will allow you to qualify for the State Pension, while keeping within a minimum tax band. Alternatively, a salary of up to £12,500 will be covered by your Personal Allowance and should be free of Income Tax – although a small amount of NI will be due.
▶︎ Dividend Payments
- A dividend payment will often be a more tax-efficient alternative to paying a salary, as dividends aren’t subject to NICs and also attract lower rates of Income Tax.
- Any dividend income above the £2,000 threshold and within the basic rate band of £12,500, attracts tax at 7.5%. Whereas dividends falling within the higher rate band or additional rate band are taxed at 32.5% and 38.1% respectively.
- Maximising the dividend allowance by 5 April 2021 may make good sense. Beyond that limit, how much you choose to pay yourself in dividends will depend on weighing up the relative tax take.
- Business owners can put some of their company’s profits into their pension, as employer pension contributions are an allowable business expense and can be offset against the company’s tax bill. Moving cash into your pension, will reduce company profits, which can lower or eliminate the liability to Corporation Tax. Another benefit is that pension contributions avoid NICs.
- So, by taking a pension contribution from the business, not only will you have reduced your company’s liability to Corporation Tax, you will have saved Income Tax and NICs on those contributions too.
- Employer contributions need to be paid before the company’s financial year-end in order for the business to qualify for the deduction during that accounting period. So if your accounting year-end is 31 March, you have less than 12 weeks to take advantage of this year’s business tax allowances.
- Contributions must abide by the rules for allowable deductions and more information can be found on HMRC’s website.
- Paying a contribution from the business may or may not be more beneficial to you than paying a personal pension contribution, as personal contributions can attract tax relief at your highest marginal rate of Income Tax. A financial adviser will be able to help you decide which method is more tax-efficient.
- In both cases, the money can be drawn flexibly from the age of 55. If you have passed your 55th birthday, you will be able to take the whole fund back and use the cash as you wish and a quarter of this will be tax-free, while the rest will be subject to Income Tax, at your highest marginal rate.
- You could add up to £40,000 to your pension this tax year using pre-tax profits from your business. But if you have not made a pension contribution this tax year, or in the previous three, you could use the carry forward rules to add significantly more to your pot.
2. Expenses – top tips
▶︎ Expenses Personally Incurred:
- It may sound obvious, but make sure you claim back all business expenses personally incurred on behalf of the business, otherwise you will out of pocket!
▶︎ Allowable Expenses:
- If you are a self-employed business owner, include all allowable expenses in your accounting records. Claiming back all of your allowable expenses can reduce some of the financial pressures that go hand in hand with being self-employed. For example, if your turnover is £40,000, and you claim £10,000 in allowable expenses, you only pay tax on the remaining £30,000.
- To make sure you’re paying the right amount of tax and can keep more of your hard-earned money, it pays to be clear what expenses you can claim back. And staying organised and keeping accurate records of your business expenses will help you keep on top of things. You can also consider investing in accounting software to help with this task.
- Allowable expenses must have been incurred specifically due to the running of your business. The table below provides examples of allowable expenses and more information is available via HMRC.
- You have four years from the end of the tax year to make a claim. So for the 2020/2021 tax year, you need to submit your allowable expenses claim by 5 April 2024.
Examples of Allowable Expenses for Self Employed Business Owners
Office expenses such as stationery, printer ink and postage costs
Business phone calls, line rental and broadband charges
The cost of business and office equipment like computers, printers and computer software – claim these as capital allowances if you don’t use cash basis accounting
Accommodation and sustenance costs on business trips
Subscriptions to trade or professional membership or journals
Professional services of accountants
Financial costs such as bank, overdraft and credit card charges, interest on bank and business loans, hire purchase interest, leasing payments and alternative finance payments*
Insurance costs e.g. public liability, employer’s liability
Staff costs – salaries, NI contributions, pensions, bonuses, benefits
Travel and accommodation expenses such as Mileage costs for business purposes
Training courses that help you expand/improve upon the knowledge and skills related to the bettering of your business
Homeworking – HMRC will allow you to claim a portion of your home expenses to meet additional costs for example for heating and lighting the work area, increased charges for internet access
*If you’re using cash basis accounting that you can only claim up to £500 in interest and bank charges
3. Family members
▶︎ The Marriage Allowance
If your spouse or civil partner has an annual income below your Personal Allowance (usually £12,500) – you may benefit as a couple by taking advantage of the Marriage Allowance. This allows you to transfer £1,250 of your Personal Allowance to your spouse or civil partner, which reduces their tax by up to £250 in the tax year.
When you transfer some of your Personal Allowance to your husband, wife or civil partner you might have to pay more tax yourself, but you could still pay less as a couple.
▶︎ Employing family members
You can employ family members in your business and take advantage of the lower tax rates and personal allowances that may be available to your spouse, civil partner, or children. This arrangement can help reduce your household’s overall tax bill.
Rules apply including that your relative has to be hired to do real work at a proper commercial wages rate and has to actually be paid. If they earn more than £111 per week, they’ll qualify for a basic state pension and the additional state pension. If they earn below £153 ,there will be no NIC liability.
Provided they are of the right age, you are allowed to employ your children in your business, and it can be an excellent way for them to develop some professional skills and work experience for the future, while earning some extra money.
You can generally employ your children if they are aged 13 or more and pay them a salary which is deductible from your business income. The salary must be commercially justified and must take into account the national minimum wage requirements if they are 16 or older.
The value of a pension with St. James’s Place may fall as well as rise. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
At Sarah Quirk Wealth Associates, our corporate financial planning service will help prepare your business for the future and help protect your assets.
We can also help small business owners to achieve their personal goals. Contact us to find out more about financial planning for your business.
The Partner Practice is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. SarahQuirk Wealth Associates is a trading name of SarahQuirk Associates Ltd.
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