Paying The Bills
Another blog post from DU Member Digital Business Coach.
If you’re anything like me this subject will have become more challenging since 23rd March. Mortgage payment and other loan repayment holidays will have helped many of us but we all know the day of reckoning must come. Regardless of what we all feel about COVID-19 it is proving to be the most disruptive event in our recent history.
75 years on from the last national emergency we are dealing with a very different one. Many of us will have been fortunate to receive financial assistance from the Government but many will receive nothing except perhaps Universal Credit. Regardless of this we must still, somehow pay the bills. The accountancy profession has stepped up during this time providing help and assistance with loan applications and business plans to support grant applications and other financial support. Many businesses will be able to pay their bills and benefit from the generous offer from the tax authorities to defer tax payments. Like you I don’t expect this spirit of generosity to last too much longer!
Our household bills must also be paid. In my house the biggest expense is the supermarket [and yes I may have been buying more wine than usual…] The cost of paying these bills comes from the money I draw from my business.
For Directors the burden of tax has been somewhat greater in recent years following George Osborne’s final act as Chancellor. You will know that the first £2,000 of dividend is tax free and after that tax climbs from 7.5% up to an eye watering 32.5% when our dividend income strays into the higher rate. It is worse again for those drawing over £150,000 as income tax on dividends is 38.1%.
Remember the days when we could draw up to the higher rate limit and suffer no income tax? We must also remember that income tax is in addition to corporation tax which remains at 19%. So, taking into account the personal allowance of £12,500 and assuming it is fully available, the director taking a salary up to that level and then a dividend [assuming profits allow] of more than £35,500 will be paying 51.5% in tax. Capping salary and dividend to below this results in tax overall of just 27.5%. Of course, many directors take higher salaries than £12,500. A mortgage lender would often lend only on salary. And, salary is an allowable business expense so saves corporation tax at 19%. The employers NI contribution of 13.8% coupled with employees NICs at 12% renders this strategy somewhat inefficient.
Over the years I have been referred to financial advisers all cheerfully offering to relieve the business of hard earned cashflow for a pension contribution. Up to £40,000* this will deliver corporation tax relief of 19% but remove – if I have it – £40,000 from the business, which now and post pandemic will prove challenging. I will resist for now, commenting on the other problems such a strategy might lead to!
Partners and sole traders take drawings to pay the bills and after the personal allowance is utilised, pay income tax at 20% together with NICs. Higher rate kicks in at 40% together with an NIC surcharge and eventually rises to 45%. They too have the pension option BUT like directors this will not help pay the bills!
Cutting costs now and post pandemic will determine how many of us survive. Taxation is as much of an expense as energy and marketing. I accept that you may have moral grounds for objecting to anyone who presents a route to lower tax bills. However, if the tax savings result from simply re-structuring how you pay yourself rather than by purchasing some high risk and ultimately doomed tax “scheme” then surely it is worth reviewing?
Imagine a situation where the business can reward you in a similar fashion to an airline company which rewards its customers with air miles. Or your favourite coffee house which rewards you for your loyalty with a fee cuppa. Imagine a situation where rather than having to account/pay corporation tax to facilitate a dividend payment – also taxed over £2,000, the business creates a corporation tax deduction leading to a rewards package to you which is not assessed. Just like that free cuppa.
I have been in the business world for more than 40 years; I learned my craft at some of our countries biggest financial firms like Lloyds Banks, Buck Patterson and KPMG. I have established businesses for the second half of that time, for myself, as joint ventures and for others. I want only to compliment the work of your accountant, show you what I do and help you avoid the numerous pitfalls out there, which will still be there when this dreaded virus no longer occupies out thinking – or rather the media’s.
Please follow me on LinkedIn and visit chris03808.wixsite.com/website
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