Tax Optimization Strategies in Business

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Managing expenses is an important part of running a limited company. Ensuring that you claim for all your business expenses will increase your tax efficiency and is the first place to start when looking at reducing your corporate and personal tax bill.
Tax Optimization Strategies in Business

Here are the few strategies for business owners can extract profit from their business:

Pension allowances

Dividend Surplus

Salary  Compensations

Private Stakes

Pension Allowances:

An important way to extract profit from the company while still benefiting from tax relief. When it comes to an individual or the company itself who pays into the pension fund, this money isn’t treated as a benefit, meaning that it’s very tax efficient. Corporate National Pension Scheme model is a win-win proposition for both the employer as well as the employee. An employer can claim tax benefit for contribution by showing it as a business expense in the profit and loss account. Employers also get tax breaks from registered pension schemes because costs – including contributions and expenses – can usually be set off against corporation tax. Employer contributions to a pension scheme attract tax relief. This makes them a tax efficient way of increasing employee benefits and remuneration and provides a good incentive for employees to join the pension scheme. Both a short-term way of extracting profit and a long-term way of planning for retirement, paying into a pension is a great way to make the most of your business’s income.

Dividend Surplus:

Dividends tend to get lumped as one single form of investment income.

There are two types of Dividends: ordinary and qualified dividends.

Ordinary Dividends: First, all dividends is considered ordinary dividends. The problem, of course, is how we loosely use the term, dividends to describe any type of payout from stocks, mutual funds, savings accounts, or other investments. Sometimes that “dividend” is interest income or a capital gains distribution.

To get more specific, ordinary dividends are paid out of earnings and profits. These are taxed at your ordinary income tax rate.

The big tax benefit is that some of these ordinary dividends can qualify for a lower tax rate

Qualified Dividends

Basically, qualified dividends are ordinary dividends that meet a specific requirement. If so, the qualified dividends are taxed at the same rate as long-term capital gains. That drops the qualified dividend tax rate down to 20%, 15%, or even 0% depending on your marginal tax rate

Dividends can be paid to anyone who owns shares in a company if the company is making sufficient profit to cover these costs.

The tax advantages of being paid dividends are twofold: firstly, they’re exempt from National Insurance Contributions and secondly, they’re discretionary. This means they can be tailored to individual needs, subject to the company being able to afford to pay them. When issued, all dividend payments should be accurately recorded, with a tax notification issued.

Salary Compensations:

Calculating tax liability often spurs confusion among business owners and employees, but with some basic tax knowledge, everyone can get a handle on what to expect come tax time. Determining how much to tax bonuses may seem complicated, but there are basically two ways employers may tax an employee’s bonus: with a flat rate tax or using an aggregate method, counting the bonus as salary. Salary taxes are usually more straightforward to calculate

To achieve maximum tax efficiency, it’s wise for directors take a minimum salary.

By keeping your salary just above the threshold of qualifying for a state pension, while keeping within a minimum tax bracket, you can get the most benefit from your wage.

One of the most obvious and appealing ways to extract profits from your company is to pay yourself a bonus. In terms of benefits, this will largely depend on whether you’re receiving a cash or non-cash bonus.

If your bonus is paid in cash or anything that can be exchanged for cash (like vouchers), this will be counted as earnings and will be subject to both PAYE and employee and employer NICs. For non-cash bonuses, the amount of tax will be dependent on the item in question.

Private Stakes:

Private investments are another opportunity to commit money to another business, helping early-stage companies to reach their next stage of growth. Investing in a private company means you can be involved from the early stages of a company’s life and make a tangible difference to its development. With the potential for EIS or SEIS eligibility, you may also be able to reap the rewards of great tax.

The SEIS and EIS incentives allows companies to raise capital, which is critical to expanding into new territories. The SEIS/EIS schemes enable investors to claim back income tax reliefs (50% for SEIS and 30% for EIS), avail of Capital Gains Tax reliefs and/or deferrals and apply for loss relief if it all goes wrong.

In respect of the company the funds can be used by an overseas subsidiary, providing that the issuing company meets the. Establishes requirement and that the overseas company is a 90% subsidiary thereof, and performing a qualifying business activity. The same income tax relief is available to the investors using the offshore or the onshore company providing that the issuing company or group, its trade and the shares to be issued all meet the requirements for an EIS or SEIS relief. 

For companies looking to explore their profit extraction options and reduce their tax bill, these avenues will help get you started. 

by Mahshid Javaheri

Mahshid Javaheri

After working as a solicitor for 3 years, Mahshid joined as an Editor and contributor of legal content. Mahshid is passionate about connecting practicing lawyer with the wider business community; she helps lawyers create and distribute insightful and actionable legal content that delivers value to businesses, whilst showcasing the lawyers’ expertise.

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