Efficient Tax Strategies for Business Owners: A Practical Guide
Dragon Argent, a firm committed to solving problems for entrepreneurs, recently hosted a highly informative webinar featuring their Strategic Tax Advisor, Sanjay. Backed by a multidisciplinary team of accountants, tax advisors, lawyers, and business strategists, Dragon Argent empowers founders to focus on growth while handling the complexities of finance, compliance, and structure. Drawing on experience gained since beginning his tax career at PwC in 2014, Sanjay has worked across global employment tax, private client, and corporate advisory roles.
In this recorded webinar, Sanjay shared essential tax strategies tailored for small to medium-sized business owners covering everything from profit extraction and group structuring to pension planning and exit readiness. The insights offered were practical, timely, and designed to help founders align their business operations with long-term personal and financial goals.
Understanding Group Structures: A Foundation for Tax Efficiency
A group structure involves a holding company at the top, owning shares in multiple subsidiaries below it, rather than individuals directly owning shares in each subsidiary. While most people start with a single company, this common approach isn't always the most tax-efficient moving forward.
Key Benefits of a Group Structure:
Flexibility and Diversification: Allows entrepreneurs to pursue multiple business ideas under one umbrella, fostering growth and future expansion.
Asset Mobility: Assets (like property) can move freely between companies within the group without incurring stamp duty or corporation tax costs, thanks to a "no gain, no loss" principle. This is particularly useful for restructuring or legal protection.
Inheritance Tax Benefits: A property company within a group structure can qualify for inheritance tax relief that it wouldn't receive as a standalone investment company.
Easier Business Sales: A group structure allows for the separation and easy sale of a specific part of your business as a limited company.
Legal Protection: Separating assets from trading elements (e.g., holding property in a different subsidiary) offers legal protection in case of lawsuits.
Group Loss Relief: Losses from a new, unprofitable subsidiary can be immediately offset against profits from other successful companies within the group, improving cash flow by reducing immediate corporation tax.
Considerations and Setup:
Administration Cost: There's a slight increase in administration due to managing multiple entities, though the holding company typically doesn't require extensive work.
Timing: Ideally, a group structure is set up at the very beginning to save future legal and administrative costs associated with moving assets around later. It can be done later via a share-for-share exchange, which can be tax-free if conditions are met, but requires significant legal work.
Registration: Group structures are registered on Companies House, where the holding company is listed as the shareholder of the subsidiaries.
EIS/SEIS Implications: While possible, it's generally not recommended to give out SEIS or EIS shares in a holding company if it owns other businesses, as investors would then have a stake in all entities. It's often advised to get through funding stages and then consider a group structure.
IP Protection: A group structure is highly desirable for companies that generate and protect novel Intellectual Property (IP).
Ownership Percentages: While 100% ownership simplifies things, a 75% group (where the holding company owns at least 75% of the subsidiary) is sufficient to access benefits like group loss relief and free asset movement.
Navigating Business Expenses: What You Can Claim
HMRC's general rule for business expenses is that they must be wholly, exclusively, and necessary for the trade of your business.
Commonly Known Expenses:
Stock for a shop.
IT equipment (laptops, computers, printers, mobile phones – including monthly contracts).
Travel and subsistence (e.g., travel to client meetings, business lunches, not daily commute).
Training courses, Continuing Professional Development (CPD) work, and conferences.
Tax-Efficient Expenses with Personal Benefits (without a benefit charge):
These expenses reduce your corporation tax liability while providing a personal benefit without leading to additional personal income tax.
Pensions: Contributions to a director's or employee's pension fund reduce corporation tax and are not considered a taxable benefit to the individual.
Life Insurance Policies: Setting up a life insurance policy for a company director can reduce corporation tax without creating a benefit charge.
Counseling Services: Now considered a non-PMD (Payrolled Medical Benefits) benefit charge.
Trivial Benefits: Small benefits up to £50 (e.g., a meal or bottle of wine for a birthday) are not considered an over benefit in kind. This is unlimited for employees but capped at £300 for directors.
Electric Cars: While there is a benefit in kind charge, it is significantly smaller than for petrol cars (currently 2-3% of the list price, increasing by 1% annually until it reaches 8% by 2030).
Cycle to Work Schemes: These are part of tax-efficient benefits.
It's important to remember that expenses can be claimed even if your company isn't yet making a profit; any resulting losses are carried forward to offset future profits.
Pension Planning: Maximising Tax-Free Growth
Pensions are highlighted as a super tax-efficient way to extract money from your company. Unlike salary or dividends, pension contributions within limits are not subject to income tax.
Key Pension Rules and Benefits:
Annual Allowance: The current limit for annual contributions is £60,000 per tax year, which can be paid into a pension fund without personal tax implications, simultaneously saving corporation tax. Tapering applies for those earning above £200,000.
Carry Forward: You can use unused annual allowances from the previous three tax years, potentially allowing for a much larger contribution in a single year (e.g., £200,000). This is highly beneficial if your company has had a particularly profitable year.
Total Contributions: Remember that the annual allowance applies to all pension contributions made across all pension funds, including those from other employment.
Investment Flexibility: Pension funds are no longer limited to stocks and shares. A significant benefit for business owners is the ability to invest in commercial property. Your pension fund can purchase a warehouse or office space, and your company can then lease it from the pension fund.
The lease cost is a corporation tax deduction for your company.
The rent generated by the pension fund is tax-free.
Any capital gains on the sale of the property by the pension fund are also tax-free.
Collective Pensions (SASS): Multiple directors or individuals can collectively contribute to a Self-Administered Scheme (SASS) to jointly purchase a commercial property and lease it back to their business.
Profit Extraction: Salary vs. Dividends and Avoiding Pitfalls
The primary ways to take money out of a business are through salary or dividends.
Salary vs. Dividends:
Salary:
Is a corporation tax deduction, reducing the company's taxable profit.
A common strategy is to take a salary up to the National Insurance (NI) threshold (around £12,570) to avoid employee NI contributions.
Above this threshold, employee NI (currently 8%) and employer NI (currently 15% above £5,000) apply, which can neutralise the corporation tax benefit.
Dividends:
Are taken after corporation tax has been paid.
Are taxed at lower rates than salary (e.g., 8.75% for basic rate taxpayers compared to 20% for salary).
A highly tax-efficient approach is to combine a basic salary (e.g., £12,500) with dividends (e.g., £37,000) to keep the average tax rate very low.
Employer's NI Allowance: If a company has two directors or an employee and a director, the first £10,500 of employer's NI is not due, making it more efficient to pay salaries.
Important Pitfalls and Tax Traps:
Dividends from Losses: It is illegal to take dividends from a company that is making losses. In such cases, money must be extracted as salary, even if it means paying tax on it.
60% Tax Trap: Income between £100,000 and £125,140 is effectively taxed at 60% due to the gradual withdrawal of the personal allowance. It's often advisable to keep income below £100,000 or aim to earn significantly more than £125,000, where the tax rate drops to 45%.
Director's Loans: If a director's loan account is overdrawn (meaning the director has taken more money out than they put in) and isn't repaid within nine months and one day of the company's year-end, the company faces a Section 455 charge of 33.75% on the overdue amount. While this is refundable upon repayment, it's a significant cash flow burden. Loans over £10,000 also constitute a benefit in kind.
Savings and Investments: Instead of taking money out of the company and paying income tax to put it into personal savings, it's generally better to keep funds within the company for investment. Similarly, for property investment, consider setting up a separate property investment company within a group structure to avoid personal income tax on the funds.
Managing Employer's NI: Salary sacrifice is a key strategy to reduce Employer's National Insurance contributions. For instance, employees can agree to forgo a portion of their salary, and the employer can then contribute a higher percentage directly into their pension fund. This saves both employer and employee NI, without impacting the employee's net pay or the total pension contribution.
Exit Planning: Maximising Value on Sale
Strategic planning for exiting your business, especially with a group structure, can significantly impact the tax you pay.
Selling a Company: Group Structure vs. Direct Ownership:
Selling within a Group Structure:
The holding company sells the subsidiary, meaning the funds go to the holding company, not directly to the individual.
The crucial benefit here is Substantial Shareholders Exemption (SSE). If eligible, the holding company pays no tax at the point of sale on the profit made from selling the subsidiary.
To qualify for SSE, the holding company must have owned the trading company for at least 12 months within the group, and held at least 10% of the share capital and 10% of the profits.
Money can then be extracted from the holding company via salary, dividends, or a members' voluntary liquidation.
Selling a Company You Own Directly:
You, as an individual, sell the shares you own, and the sale is subject to Capital Gains Tax (CGT).
You may be eligible for Business Asset Disposal Relief (BADR) (formerly Entrepreneurs' Relief), which reduces the CGT rate from 24% to 18% (for the next tax year) on the first £1 million of lifetime gains.
To qualify for BADR, you must have owned the trading company for two years prior to sale, been an employee or office holder, and owned at least 5% of the shares with voting rights and 5% of the profits.
Planning for Exit:
Timing for Group Structures: If you plan to move assets between companies within a group structure, it's best to do so at least six years before sale for capital gains tax purposes and three years for stamp duty purposes, to avoid "degouping charges".
Meet Conditions: Ensure you meet the specific conditions for BADR (two years) or SSE (12 months) before the sale.
Trading Company Status: Both SSE and BADR are only available for trading companies, not investment companies (e.g., property companies or those holding investments). HMRC considers a company a trading company if less than 20% of its profits, income, or spending comes from investment activities.
The single most important takeaway for business owners?
Review how you extract money from your business. Your approach to salary, dividends, and pension contributions can have a major impact on both your current and future tax liabilities. By acting now and making the most of available tax bands, you can avoid paying significantly more down the line.
Because effective tax planning is never one-size-fits-all, tailored advice is essential.
👉 Book a free discovery call with Sanjay to explore how you can optimise your remuneration strategy and build a more tax-efficient future for you and your business.
Speak to one of our Tax Advisers today ↓
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