When you find yourself near the higher rate tax threshold, exploring ways to minimize tax liability and optimize personal income is quite common.
In this article, we will delve into various tax-efficient strategies that can be employed to pay yourself when you've reached or are about to reach that threshold.
Dividend Payments at the Higher Tax Rate: Paying dividends is a common method for business owners to extract profits from their limited companies. However it's important to be aware that, when operating near the higher tax threshold, dividends can incur a tax rate as high as 33%. With this in mind it's essential to calculate the net gain after taxes before deciding to utilize this option.
Leaving Funds in the Company: Leaving funds in the company instead of immediately withdrawing them can be beneficial. Profits retained within the company are subject to a lower tax rate when the company is eventually closed. This approach can lead to substantial tax savings, especially when the company qualifies for the lower rate of 10% on closing profits.
Pension Contributions from the Limited Company: Directly contributing to a pension scheme from a limited company offers a twofold benefit. First, it is a legitimate business expense that can be deducted from the company's profits, effectively reducing the overall tax liability. Second, it serves as a tax-efficient means to save for retirement without immediate personal taxation. While this doesn't increase take-home pay, it reduces the corporation tax burden, benefiting the business owner in the long run.
Transferring Shares to a Spouse: If you, as a business owner, have a spouse, transferring shares to them might be a viable option. By doing so, dividends can be distributed between both spouses, potentially taking advantage of lower tax bands and reducing the overall tax liability. You can check out our article here for more information on transferring shares to a spouse. Please reach out to our team if you would like further advice on share transfers.
Personal Pension Contributions: Contributing to a personal pension from personal funds is another strategy to consider. This contribution increases the basic rate tax band, allowing the business owner to draw more salary or dividends within a lower tax bracket. This approach effectively optimizes personal income while minimizing the tax burden.
When you find yourself at the higher tax threshold it's important to be aware of the options available to you so that you can stay as tax efficient as possible.
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