As a business owner, your personal financial strategy should guide every decision you make. Understanding your financial needs for everyday life and long-term goals allows you to align your business plan accordingly.
The success of your venture hinges on the quality of your product, your reputation in the market, and a sound pricing strategy. However, effective tax planning is equally vital in maximising your profits.
Which business structure?
Choosing the right business structure is crucial. The three main options include:
- Sole Trader
- Partnership
- Limited Company
Sole traders and partnerships are taxed on their business profits at rates ranging from 20% to 45% (19% to 47% in Scotland). There’s no option to defer profits to lower your tax bill, and National Insurance is also payable. Additionally, there’s typically no separation between personal and business finances, which can be risky in bankruptcy or legal situations.
Limited liability partnerships (LLP) may offer some protection, so consulting a legal expert is advisable.
A limited company is a distinct legal entity, providing a separation of personal and business assets and enabling a more tax-efficient income structure.
While limited companies come with increased reporting requirements and costs (such as needing an accountant), they generally offer greater savings for all but the smallest businesses.
Drawing your income
Limited companies provide more flexibility in structuring your income.
Most directors take a basic salary within their tax-free personal allowance, while the remainder is drawn through dividends, with the first £500 of dividend income being tax-free.
Shares can be allocated between spouses or even gifted to children to make the most of this allowance. The remaining income is taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers.
This structure is generally more tax-efficient than self-employed income. Notably:
- Self-employed income incurs National Insurance at 9% on earnings between £12,570 and £50,270, and 2% thereafter. In contrast, dividends aren’t subject to National Insurance, which can lead to substantial savings. Drawing a salary of at least £6,396 also allows you to accumulate NI credits for State Pension entitlement.
- Dividends are taxed only when declared, allowing you to keep money in the business and manage tax liabilities effectively. Directors can also utilise director’s loans for tax-efficient income, enabling you to reclaim investments without immediate tax implications as profits grow.
Allowable costs
Business owners can claim various expenses against their tax bill. Eligible costs include supplies, stationery, and services like IT and accounting. As your business expands, rental and staff costs also become allowable.
Key allowable costs include:
- Interest on business loans
- Life insurance for yourself and employees
- A mileage allowance of 45p per mile for business travel (25p per mile over 10,000 miles)
- Company events, such as Christmas parties (capped at £150 per person)
- Costs associated with working from home.
- Capital allowances are also available for investments in machinery, vans, and computer equipment.
However, not all costs are allowable, including:
- Commuting expenses
- Client entertainment
- Childcare costs
- Fines
Maximise your pension
Pensions are one of the most tax-efficient ways to save for retirement. While many business owners view their business as their primary pension, there are compelling reasons to utilise both approaches. Key benefits include:
- Pension contributions are normally an allowable business expense.
- Unlike personal contributions, company contributions aren’t limited by earnings, but they must adhere to the annual allowance of £60,000 for 2024/2025. Contributions should be reasonable and directly related to business purposes.
- A pension allows you to build wealth outside the business, which is protected from creditors in the event of insolvency.
- Certain pension schemes can provide loans to the sponsoring employer or be used to purchase commercial properties. This is a complex area, so seeking guidance from an independent financial adviser in Cirencester is strongly recommended.
- As you transition to retirement, combining pension income with dividends can help maximise your tax allowances.
For tailored strategies in wealth management in Cirencester, it’s beneficial to consult a retirement planning specialist.
Business succession
At some point, you’ll need to plan for the future of your business. Various tax reliefs are available depending on your chosen route:
Selling the business
When you sell a business, you’ll pay Capital Gains Tax (CGT) on the gain. CGT is typically charged at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, with most gains falling into the higher bracket. However, Business Asset Disposal Relief caps CGT at 10% on the first £1 million of lifetime gains. As announced in the recent Budget, from 6th April 2025, this rate will increase to 14%, and from 6th April 2026, it will rise to 18%.
Passing the business on
If you wish to pass your business to your children, this usually qualifies for ‘holdover relief.’ No Capital Gains Tax is payable at the outset, but if your children sell the business later, they’ll incur CGT on your gain and their own. This is a complex area so it’s advisable to seek professional advice from a financial advisor in Cirencester or an accountant if you’re considering claiming Holdover Relief.
You can transfer the business as an outright gift or gradually transfer shares over time. Remember, gifts remain within your estate for Inheritance Tax purposes for seven years.
Contact us today for personalised financial planning advice tailored to your business needs. Let our experienced team of financial advisors in Cirencester help you maximise your wealth.
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance.
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Read moreIndependent financial advisor Cirencester, financial advice for business owners and company directors in Cirencester
Abode Financial Advisers is an Independent Financial Advisor in Cirencester.
Abode Financial Advisers is a financial adviser based in Cirencester, Gloucestershire. Abode Financial Planning is an independent financial advice firm offering comprehensive financial planning services, including: independent financial advice, retirement planning, pension advice, investment advice, wealth management, and inheritance tax planning.
If you wish to discuss your situation, contact us for a no-obligation initial call, held at our expense. Call us on 01285 703 060.
Abode Financial Advisers is located at Watermoor Point, Watermoor Road, Cirencester, Gloucestershire, GL7 1LF.