How much of your profits do HMRC get?
The usual ways of minimising your company's taxable profits have varying degrees of effectiveness.
- Increase your salary or that of the directors. The real beneficiary here would be HMRC, as you or your directors will be slammed for further NI and tax at your highest marginal rate. Additionally, the company will have to bear even more employer's NI. This route is NOT cost effective and could even affect your business's ability to perform!
- Create or expand existing pension provision for yourself or the directors. Tax efficient. Totally inflexible.
- Pay yourself or your directors dividends. Again you will be liable for further tax at your highest marginal rate, although with no further NI contributions from either yourself or your company. Slightly more tax-efficient.
- Entrepreneur's Relief. This is available to company owners/major shareholders who wish to possibly sell a part or the whole of their business/shareholding and is capped currently at £1,000,000, above this limit you will be subject to the flat rate of 18% Capital Gains Tax. More cost effective again, but only if selling the business or your shares is what you really want to do.
For options 1-3 the following table demonstrates how tax strips away money as it moves from your company's bottom line to your back pocket:
| Tax, tax, tax! HMRC tax rates (2008-2009) | |||||
|---|---|---|---|---|---|
| 1. First, your business is subject to these tax rates: | |||||
| Profit Level: | up to £300k | £300k to £1.5m | over £1.5m | ||
| Corporation Tax: | 22% | 29.75% | 28% | 12.8% ENI | 12.8% ENI |
| 2. Then, you pay these rates on the income you take: | |||||
| Dividend | Dividend | Dividend | Salary | Salary | |
| 32.5% | 32.5% | 32.5% | < 34,800 | > 34,801 | |
| 11% NI | 11% NI | ||||
| 20% Tax | 40% Tax | ||||
| 3. The combined tax rates make for uncomfortable reading! | |||||
| Total Tax | Total Tax | Total Tax | Total Tax | Total Tax | |
| 54.5% | 62.25% | 60.5% | 43.8% | 63.8% | |
And it gets worse!
From April 2009 NI & ENI each increase by 0.5%. In April 2010, top earners with gross income over £150,000 will be taxed at 45% paying a total tax of 68.8% and paying 37.5% on their dividends!