How To Take Money Out of Your Business in the Most Tax-Efficient Way
Jonathon Jay of DSW Wealth Planning explains how business owners can be more tax-efficient
As a business owner, you want to maximise the amount you earn from your business while minimising the amount of tax you pay. But without having a strategy, it can be tempting to leave cash in the business to avoid tax liabilities.
One of the key issues we see when working with business owners who haven’t received professional advice before is that they accumulate cash in their business unnecessarily. In some cases they build a balance so significant that drawing it would incur a big tax bill.
However, there are some consequences to holding so much cash. Firstly, it prevents you building assets outside of the company to ensure your family’s financial position is independent of your business.
Then there is also the impact on Business Relief in the event of your death. If you have so much cash that it cannot be justifiably argued that it is for a future business use, then you may not get the Inheritance Tax relief on the balance, incurring an avoidable tax liability. Additionally, you can only get relief if the deceased owned the business or asset for at least 2 years before death.
So, it is useful for business owners to understand how to draw cash from their business in the most tax efficient ways. There are four key strategies:
Salary and dividends
One of the most straightforward ways to draw cash from your business is through a combination of salary and dividends. You can pay yourself a salary that is subject to National Insurance Contributions (NICs) and Income Tax, with any remaining drawings as dividends, which are taxed at a lower rate and not subject to NICs.
Reimbursement of expenses
if you have incurred business expenses such as travel, supplies or equipment, you can be reimbursed for those expenses tax-free. Reimbursements are not considered a taxable income, and they can be a useful way to take cash from your business without incurring an additional tax liability. However, you should only claim expenses where you have evidence that they were incurred for business purposes.
Pension contributions
one of the most tax efficient ways to draw money from your business, pension contributions are tax-deductible both personally and to the business and can reduce your corporation tax liability too. Pensions also offer tax-free growth and you can access part of your pension tax-free in retirement, making it a great place for long-term savings.
R&D tax credits
Companies that invest time and money in developing new products or services, or further developing existing products or services, may be eligible for Research & Development Tax Credits. These credits can be paid as a cash payment or offset against your Corporation Tax liability.
Wealth Planning for business owners is about helping you establish a level of financial security outside your business. Our team work closely with our in-house tax advisory team to make sure we utilise all tools available to help you achieve maximum benefit from your business now and into the future, giving you both a stronger business and also a stronger personal financial position.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
The Financial Conduct Authority does not regulate Tax Planning
Important Notes
The information contained within this article is for guidance only and is based on our current understanding of UK pension tax legislation. It does not constitute advice which should always be obtained when considering pension benefits.
DSW Wealth Planning is a trading name of Dow Schofield Watts Wealth Planning LLP which is an appointed representative of Corbel Partners Limited which is authorised and regulated by the Financial Conduct Authority.
Dow Schofield Watts Wealth Planning LLP is Registered in England and Wales. Registered Number: OC441562. Registered Office: 7400 Daresbury Park, Warrington, WA4 4BS.
