Many tax advisors say a low salary and higher dividends is the way forward, but with taxation being what it is right now, is it time to re-evaluate that thinking?
"Income Tax has increased on dividends!"
If you need to extract income from your business regularly, then dividends are still the preferred route; however, the most tax-efficient approach are long-term pension contributions. This is, of course, subject to market performance.
All registered pension schemes can accept contributions, and many can accept them from both the individual and from the company itself. A company can contribute up to £40,000 per year (subject to annual allowances), and if the previous 3 years' allowances were not fully used, a larger top-up contribution could be made.
Company contributions are not subject to relevant earnings where, obviously, individual pension contributions are. High earners may find their annual allowances tapered. One great benefit of pension contributions is that they are not subject to the company making a profit like dividends are. If you make a loss in one year, you can still pay into the pension.
Pension contributions get a full Corporation Tax deduction, and there's no national insurance due either, so if you're concerned about the Corporate Tax rising to 25% over the next few years, then putting more in the pension is a great idea. The only downside to making pension contributions is that you can't access them until you're 55.
"If you're a young entrepreneur you'll have a long wait!"
Pension fund growth depends on the markets, but also what the directors want the pension provider to invest in. Generally, pensions grow tax-free and are a great way to extract income from your limited company.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about company pension contributions, click here to get in touch or give me a call on 01908 774323 and let's see how I can help.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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