6. Pensions – use tax-free contributions to reduce Corporation Tax
Contributions to director and staff pension schemes are an extremely tax-efficient method of extracting funds from a company. They are largely tax-free in the hands of the pension scheme and are tax-deductible for the company.
Company pension contributions can be made to fully utilise a director’s annual pension contributions allowance plus any unused allowances from previous years.
Another common planning idea is to use company pension contributions to enable a pension scheme to accumulate funds to acquire commercial property – see below for further details.
7. Optimise your company/group structure
As businesses expand, they often end up with many different activities in one company or with many stand-alone companies established for each separate activity. Both can lead to tax inefficiencies. A review can be undertaken to establish the business's most tax-efficient structure, including consideration of the shareholders’ ultimate aims. Possibilities may include:
- A group structure with a holding company owning various subsidiaries - this achieves legal separation of the various activities whilst retaining the tax benefits afforded by operating within a group of companies
- Shareholders holding individual companies directly rather than using a holding company. This can sometimes be more tax efficient if an individual company may be sold.
Learn more about setting up a Holding Company
8. Offer share incentives to attract and retain key employees
For many businesses, it is important to incentivise and retain key employees to maximise business performance and align their interests with the shareholders to optimise the eventual sale price. This can be done using share options and other incentives prior to a sale.
An EMI scheme is an HMRC-approved employee share scheme. It is available to most SME trading companies. It allows employers to tax efficiently and enable key employees to acquire shares in the future that can be dependent on performance and other criteria (such as the company being sold).
The benefit of this is that the employee knows they can obtain shares in the future if they stay with the company and perform, and the business owner knows they won’t have to give up any equity unless the employee stays and performs.
These can be a useful way of allowing key employees to share in a sale of the company in a tax-efficient manner for all concerned.
9. Tax-free disposals of subsidiaries
A group of companies wishing to sell a subsidiary can sometimes use the Substantial Shareholding Exemption to sell it without any tax charges on any gain on the sale. The tax-free proceeds can then be used by the selling group to invest in other activities.
10. Extract cash in a tax-efficient way
With IT and NI rates as high as a combined 48%, it is important to regularly review the most tax-efficient way for business owners to be remunerated. There are several ways to extract value from a business, including salary, dividends, benefits, rent, interest and pension contributions.
Each carries different combined tax rates as illustrated below*
|
Basic rate taxpayer (%) |
Higher rate taxpayer (%) |
Additional rate taxpayer (%) |
Salary / Bonus |
36.7 |
49 |
53.4 |
Dividends |
31.6 |
50.3 |
54.5 |
Rents received |
20 |
40 |
45 |
Interest |
20 |
40 |
45 |
Self-employed income |
26 |
42 |
47 |
Pension contributions |
0 |
0 |
0 |
A review should be undertaken to ascertain the most tax-efficient mix of these income sources, considering that tax rates can change from year to year.
*The above rates are illustrative and only applicable from April 2024 and can change depending on individual circumstances, so they shouldn’t be relied on without bespoke advice being sought.
11. Optimise tax relief for losses
Tax losses can be relieved in many different ways, which vary depending upon the activity that gave rise to the losses and when they arose. For companies, there is much more flexibility in offsetting losses that have arisen since April 2017, especially for groups of companies. In some circumstances, if the losses arose from particular activities, they may be able to be surrendered for a cash payment rather than waiting to offset them against future profits.
The timing of relief is particularly important to maximise efficiency now that different rates of tax can apply to different tax years or to different companies within a group.
All companies with tax losses of any kind should, therefore, carefully review the most tax-efficient way to obtain relief for them.
12. Reinvest proceeds on the sale of business assets to defer gains
If the proceeds received on the sale of a business asset are reinvested in replacement business assets, gains arising on the sale can sometimes be deferred until the replacement asset is sold, leading to a reduction in immediate CT liabilities.
13. Receive rent from the business
Charging a company rent for assets such as properties is another tax-efficient way of extracting cash from a company. Again, advice should be sought if this is of interest because there can be other consequences to be aware of.
Scott Burkinshaw
Scott is Tax Partner at Shorts, specialising in providing strategic corporate and personal tax advice.
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