Explore Wealth Management, one of the North East’s longest established independent financial advisers,has spoken about how businesses can reduce their corporation tax.
The Cramlington-based firm, which was recently listed among the UK’s top 250 financial advisers based on the independent consumer ratings website VouchedFor.co.uk, has said there are various ways businesses can manage the amount of corporation tax they have to pay.
Stephen Sumner, managing director of Explore Wealth Management said: “Many business owners I have seen in recent months have brought up the subject of corporation tax and the new rules regarding the taxation of dividends or profits in their business. Up until recently most business owners, whilst still being liable for 20% corporation tax on their profits, were able to take most of their profits without any liability to income tax, providing these payments did not exceed the 40% income tax threshold of earnings over £43,000 per annum (threshold for the current tax year).
“The new rules brought in now state that the first £5,000 of dividends are free of income tax however any dividends over this amount will now be taxed at 7.5%. Any dividends drawn where the income exceeds £43,000 will now be taxed at 32.5%.
“Clients have asked how they can reduce their corporation tax bill and also extract money from the business in a tax efficient way. My answer to this question is simple. Place up to the maximum permitted £40,000 as a pension contribution and as an employer payment. It’s a little known fact that employer pension payments are in most cases classed as a legitimate business expense and if say a £40,000 pension payment for an individual was made, then a limited company’s corporation tax bill would be reduced by a massive £8,000.
“In the past I’ve found that some business owners have been reluctant to invest in pensions because of fears of locking up capital which they would prefer to keep in a more liquid format. This is no longer an issue for those aged over 55 as under the new pension rules they can “cash in” all or part of the pension fund at any time if necessary.
“In most cases I am advising clients to draw the maximum dividends but ensure that their total income does not exceed £43,000 per annum. Any further funds they wish to draw out of their business should be made by way of a company payment into a pension plan, significantly reducing the corporation tax and income tax liability.”