This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Being a UK business owner can bring lots of opportunities including more control over your working hours and the potential to grow wealth as your business expands. However, it also brings greater complexities – particularly when it comes to tax planning.
Many owners and directors acknowledge the need to attend to their personal tax plan, as well as to their business tax plan. Yet optimising each of them – whilst ensuring both work together to achieve common goals – can be challenging without professional help.
In this guide, our Lancashire financial planners here at Elmfield explain how these two categories of taxes differ, how they can interrelate and ways that they can be integrated into a unified, coherent tax plan.
What are personal taxes and business taxes in the UK?
Neatly separating personal and business taxes is not straightforward especially since self-employed people might see them, largely, as the same thing.
As a starting point, however, Income Tax can mainly be conceived as a personal tax. This applies to your earnings, such as an employee’s salary, pension income and other sources.
Inheritance tax (IHT) is also largely thought of as a personal tax. This applies to the value of your estate once it exceeds your tax-free allowances. In 2023-24, the Nil Rate Band lets you pass down £325,000 to your beneficiaries without IHT.
By contrast, Corporation Tax is regarded as a business tax. This is levied at 19% on profits earned by limited companies, unless these exceed £250,000 per year (in which case, it is 25%).
VAT (value-added tax) also largely falls into the business tax category. Once a business reaches a certain size (turnover of £85,000 per year excluding VAT-exempt sales), then it must register for VAT. At this point, all VAT-able products and services must be charged on their sale. The good news, however, is that VAT can be claimed back on certain products and services that the business buys (“input tax”).
This provides an initial idea of the UK’s tax landscape. However, when we drill down further, we see that two tax categories are not always clean-cut.
For instance, business directors of limited companies will still take a salary. As such, this will be subject to Income Tax and National Insurance (NI).
Certain investor taxes also blur the lines. For example, dividend income may come to an individual from her stake in her limited company. Since dividends tend to come from company profits, this has a knock-on effect to its Corporation Tax bill.
For self-employed people, moreover, their business profits may largely also comprise their personal income. They do not pay Corporation Tax, but may just pay Income Tax on their business profits.
How do I navigate these taxes as a business owner?
As you can see, the UK tax landscape is complex. It also changes regularly. Each area of tax can affect other areas in your business and personal financial plan.
The best way to navigate these taxes optimally and confidently depends on your goals and circumstances. Speaking with a financial planner can help provide greater clarity, revealing areas of tax opportunity and risk which you may have overlooked.
At times, you may need to decide between competing goals. For instance, is your goal primarily to grow the business (as tax-efficiently as possible)? Or, is it to extract as much value from your business as possible, without harming it, to facilitate a personal goal – e.g. retirement?
In certain cases, it might help your personal and business goals to consider changing the legal structure of the business. Common structures in the UK include sole proprietorship, partnership and limited company. Each has its own tax advantages and disadvantages.
A sole proprietorship (sole trader), for instance, usually has fewer tax responsibilities than a limited company and does not need to worry about Corporation Tax. However, you may have fewer tax planning opportunities compared to a company director.
In particular, Corporation Tax is lower than the Higher Rate and Additional Rate for Income Tax (40% and 45%, respectively) even at the 25% rate on profits over £250,000. Companies also do not pay Income Tax or NI on profits. However, they cannot benefit from the tax-free Personal Allowance (£12,500 in 2023-24).
For company directors, a good subject to explore with your financial planner is how to optimise your salary and dividend payments. Income Tax rates are higher than those for dividends in 2023-24, so this may lead directors to want to prioritise the latter as their main income source.
However, doing so could affect other areas of your financial plan. In particular, if you want to take out a mortgage, you may not be able to borrow as much as someone with a higher salary (since dividends may not be regarded as a stable income source by lenders).
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
