Family company recommendations

Published on 8th April 2020

1. Decide what to take out

The most tax-efficient way to extract profits for director-shareholders is usually to pay a minimal salary and top up with dividends, to keep state pension entitlement but stopping before National Insurance contributions are due.

However, remember that company profits taken as dividends are first chargeable to corporation tax.

Where finances are such that you don’t need to extract profits, consider leaving some in the company. They stand to be taxed at corporation tax rates, but this is lower than paying income tax rates.

2. Think pensions

Extracting profit from your company via pension contributions can be very tax efficient.

If the company makes employer pension contributions for directors, it is generally free of tax for the director and, subject to certain conditions being met, provides corporation tax relief for the company. There is no National Insurance for the employer or director on the contribution.

There are still limits to watch. The annual allowance is the total employer and employee contribution that can be put into a defined contribution pension scheme each year. The annual allowance can fall by £1 for every £2 of ‘adjusted’ income over £150,000, until it reaches a minimum of £10,000. Adjusted income includes total income and employer pension contributions for the year.

On the other hand, there may be unused annual allowance from the three previous years, which can give scope for significant pension contribution without a charge.

3. Review loans from the company

Director-shareholders in family companies often have a ‘loan’ advance from the company.

A director’s loan is any money received from the company that is not salary, dividend, repayment of expenses or money you have previously paid or lent to the company. If you have a loan from your family company, it faces a tax charge if it’s not paid back within nine months of the end of your accounting period.

Tax efficient ways to make the repayment include awarding a valid bonus or dividend.

4. Work out where family fits in

Employing a spouse, sibling, or the next generation can mean more opportunities to extract profit from the company before higher rates of income tax.

5. Plan ahead

Decisions that you take now can affect access to reliefs like Entrepreneurs’ Relief for capital gains tax purposes and Business Property Relief for inheritance tax.

Don’t accidentally turn from a trading business into an investment company. This can be a risk if your company buys land or property, or you retain considerable profits in the company.

Please contact us to shape tax-efficient solutions for your family company.