By Mike McGeary
Making a success of your business is hard work – so the last thing you want to do is hand more of the profits over to the taxman than you need to.
Yet that’s exactly what might happen if you don’t take some relatively simple steps to avoid it, says award-winning independent financial adviser Robert Little.
If you’re either an owner-director or partner who works in a limited company, or a sole trader, and have built up a cash surplus in the business, you should think carefully before deciding what to do with it.
Options include keeping the money in the business for future expansion or paying yourself a dividend. But the latter has become less attractive since changes introduced last year.
Any dividends above £5,000 are now taxed at 7.5% and at 32.5% for the higher rate bands. Next year the allowance reduces even further.
But Robert, director of Redcar’s Bob Little & Co, says a third option, paying money into your pension pot, can bring considerable tax benefits.
“Most people aren’t aware of this before they come to see us,” says Robert, whose company was recently named North East Adviser Firm of the Year.
“You may be able to make a contribution to your pension that’s not subject to corporation tax, providing it meets HMRC’s ‘wholly and exclusively’ test and the payment is only made for legitimate trade purposes.
“This option is not open to everyone. For example, if your husband or wife works part-time for the business, any payment into their pension must be commensurate with the work they do, to qualify for tax relief.
“But if you are eligible, as well as the straightforward taxation benefits, you’re building up your own personal assets outside the business. You don’t have to declare it on your tax return or pay any tax or National Insurance.
“And there’s another benefit that’s often overlooked, related to something called Business Property Relief. The value of shares in a limited company engaged in most trades is normally excluded from the value of an estate for Inheritance Tax purposes.
“However, if the business holds too much cash this excess can be included in the value of an estate. At the 40% rate of Inheritance Tax, that’s going to bring a substantial bill – and possibly cash-flow problems for the business and its owners.
“If you paid that money out as a dividend and it was in your bank account or ISA or paid off your mortgage, that all increases the estate’s value. But paying it into a personal pension doesn’t.”
Bob Little & Co, the firm started by Robert’s late father, Bob, back in 1985, has enjoyed a highly eventful period since becoming one of only a handful of North East firms to be awarded Chartered status by the Chartered Insurance Institute in 2014.
Last year Robert was a finalist in the Personal Finance Society’s Investment Advice Specialist category and then in February the firm won the regional title at the Professional Adviser Awards in London.
But ambitious Robert, who has a First Class Financial Economics degree and, at 28, is one of the country’s youngest chartered financial planners, has no intention of resting on his laurels. He is currently preparing for another exam which focuses purely on investments.
“Very few financial advisors have this qualification, but my job involves assessing different investment options for clients, so it’s given me a lot more insight into how investment managers make their decisions,” he says.
The firm, which has four advisers and seven support staff, is based at Kirkleatham Business Park and offers advice on areas including savings and investments, retirement planning, mortgages and tax planning.