Since the introduction of Entrepreneur’s relief, the absolute best way of saving the most tax is to:
– Start a busines
– Grow a business
– Take out up to £38,000 tax free (after paying 20% corporation tax)
– Sell the business
– Everything is then taxed at 10% (as long as you qualify for Entrepreneur’s relief
When I say ‘everything’, I am talking about the proceeds of the sale but also all of the accumulated profits. If you were able to live off £38,000 then ultimately all of your excess profit would be taxed at 10% over the life of the business. This beats taking out excess dividends that would be taxed at 25%.
So far so good, however, the word on the street is that HMRC are considering taxing the accumulated profits as income meaning they will be taxed at the dividend tax rates when they are taken out the company.
So rather than paying 10% on everything, you’d pay 10% on the sale on the business but dividend tax rates on the accumulated profits which could be 32.5% or 38.1%.
If you have £200,000 in the bank and sell your business for £700,000. The £700,000 could be taxed at 10% whilst the £200,000 would still be taxed at income (at the moment, you can have it taxed at 10%).
This means that you have to take the £200,000 out of the company as dividends and pay lots of dividend tax on it potentially 32.5% and 38.11%!
However, there is a way of actually being taxed at less than 10% on the whole of the £200,000.
If you only take out £43,000 a year, you will effectively be only taxed at 4.7%. The first £16,000 is tax-free (£11,000 personal allowance and £5,000 dividend tax free allowance) and the next £27,000 is taxed at 7.5%. Overall, this gives you a tax bill of £2,025.
You would then have to take out £43,000 out of your company over the next 5 years to pay this overall tax at 4.7%.
The disadvantage is that you have to wait for your income and it won’t be doing much in your company BUT remember you still have the income from your business sale (taxed at 10%) to live off and invest.