The post-pandemic bounce back in the economy means that well run SME’s are returning to higher levels of profitability and while this gives business owners the opportunity to draw out more profit, many are reluctant to do so because they do not wish to incur high personal tax liabilities. Income tax rates range from 20% to 45% (8.75% to 39.35% for dividends) but an integral part of the income tax system is a series of tax bands which impact on taxpayers as they pass from one rate to another (or suffer some other related tax charge) and it is these bands which influence many tax planning choices.
The key tax bands are as follows:
• An increase from 20% to 40% on incomes which exceed the basic rate tax band (£50,270 for 2023/24).
• The loss of child benefit when the highest household income exceeds £50,000 (and these benefits disappear altogether when incomes reach £60,000).
• The gradual loss of personal allowances when incomes exceed £100,000 and a total loss of the personal allowance once the income over £100,000 reaches twice the amount of the personal allowance (which is £12,570 in 2023/24).
• An increase from 40% to 45% (33.75% to 39.35% for dividends) on incomes which exceed £125,140.
Therefore, many business owners are faced with a choice: do they draw out whatever profit is available and accept the tax consequences or leave the money in the company? And if they do leave the money in the company, is this an acceptable long term option? The answer to that really depends on whether the owners need to draw out the money to pay personal liabilities, such as mortgages and school fees, in which case, they have little choice but to accept the tax position and plan accordingly.
However, if owners wish to use profits for personal investment purposes (for example to invest in ISA’s or property), then there is an argument in favour of leaving the profits in the company and treating the company as the personal investment vehicle. In some cases, such as ISA’s, the tax benefits will not be available to the company, but these can easily be outweighed by the tax which is saved by not withdrawing the funds in the first place.
One major area of concern is what happens if the company gets into financial trouble? Will the company investments be at risk? In general, the answer to that is yes, all of the company’s assets are at risk and can be used or sold to pay the creditors in the event of a liquidation. Therefore, can anything be done to protect the position? One answer is to set up a holding company which will not only hold the shares in the trading subsidiary but can act as the personal investment company. The investment assets can be transferred into the holding company and will not be available to the creditors of the trading subsidiary. An investment strategy can then be developed for the assets which are held in the holding company.
The views expressed in this article are personal and should not be relied upon without taking advice which is specific to your circumstances.
For more information on Personal Investment Company, please contact Paul Feist on 01273 701200 or email paulf@plusaccounting.co.uk
Author: Paul Feist, Managing Director, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 2 February 2016
Last Updated: 04 January 2024