What is the right fiscal strategy for my business?
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Matthew Beck is a Chartered Financial Planner at Smith & Pinching advises on salary, dividend and pension strategies for new businesses.
I am a director of a small company I set up five years ago with a business partner who is the other director. Our company currently turns over about £5 million a year. We’ve paid ourselves very limited salaries and dividends over the years as we developed the business, but it is now well established and profitable so we would like to begin to take more out for ourselves, both in terms of income now and pension contributions for the future. We’re struggling to decide what strategy to adopt: can you help?
Matthew Beck of Smith & Pinching responds:
This is a highly complex area of planning – I’d need to know everything about your circumstances, your business and your future plans to even begin to help you. However, here are some basics pointers which you might find helpful.
Taking a low salary and making up your income needs through dividends is a common strategy for company directors and does have advantages from a tax perspective as the rate of tax on dividends is considerably lower than that of income tax, particularly if you are looking at an income that could potentially put you in the higher rate income tax bracket. In addition, you and your fellow director each have a dividend allowance of £2,000 per year.
Pension contributions are an important element of your directors’ remuneration package and they can be very tax-efficient for both you as individuals and for your company. There’s no limit on what your company can pay into your pension fund, although the annual allowance can limit tax efficiency if this is exceeded. In addition, you can make a personal contribution of up to 100pc of your salary, up to the annual allowance – or £3,600 if your salary is less than this.
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Company pension contributions are good for the company too: firstly they can be set against profits for Corporation Tax purposes and secondly if they are paid as an alternative to salary, they can reduce the Employer’s National Insurance contribution liability.
There’s another potential benefit to your business that you might consider: if it is suitable, your pension fund could purchase your business premises. To do this, you would need to set up a Self-Invested Personal Pension (SIPP): a SIPP allows you to choose what assets you hold in your pension scheme from a wide range of asset types including commercial property and can hold mortgages. SIPPs are relatively sophisticated pension schemes so it would be important to understand all the implications.
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I strongly recommend that you discuss your salary/dividend/pension strategy in detail with an independent financial adviser. By punching the numbers into different scenarios, it will be possible to identify what solution would work best for you and your fellow director.
Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.
For more information visit smith-pinching.co.uk