Umesh Modi and Vinku Shah recommend careful planning and restructuring of the business as some of the ways to reduce and mitigate liabilities in the current tax year…
As we move into the new tax year 2022/23, with more tax increases in the pipeline, it is imperative to look at any planning opportunities available to save some tax, extract cash from the business and reduce overall tax liabilities. We list below some of the ideas in the new tax year so that you can plan ahead.
As a director of a limited company, you are entitled to be paid a salary for your work and so are members of your family who work for the company. Paying at least a small salary can be beneficial, particularly when the recipient does not already have the 35 qualifying years needed for entitlement to the full single-tier state pension.
To preserve entitlement to state pension, and to ensure the year counts as a qualifying year, it is advisable to pay a salary at least equal to the lower earnings limit for National Insurance Contributions (NIC) which is set at £123 a week for 2022/2023 i.e., £533 per month or £6,396 per annum. Salaries may be beneficial where funds are needed in a recession for example, and the company does not have sufficient reserves to pay dividends.
The national insurance contributions rate increased by 1.25 per cent and on 25th March 2022 the government announced that the NIC threshold will be increased to the personal allowance which is £12,570 for 2022/2023. Therefore, this will counter some of the effects of the increase NIC rate.
The annual tax-free dividend allowance for 2022/2023 is £2,000. Although referred to as an ‘allowance’, it is a zero-rate band and therefore uses up your basic or higher rate band as appropriate.
Dividends are treated as the top slice of income and for 2022/2023, dividend income is taxed at 8.25 per cent (increased by 1.25 per cent from last tax year) to the extent it falls within the basic rate band, 33.75 per cent (up from 32.5 per cent) if it falls within the higher rate band and 39.35 per cent (up from 38.1 per cent) to the extent it falls within the additional rate band.
It is important to put together all your sources of income before deciding on the level of dividends to draw as these other sources of income will utilise the basic rate band before dividends can be taxed. The company will need to have sufficient reserves to be able to pay a dividend to its shareholders.
The annual employment allowance for 2022/2023 has increased from £4,000 to £5,000 and is available to most companies. This is not available if the company is a personal company where the sole employee is also a director. Most pharmacy contractors will be operating as a limited company and will employ staff other than directors and the allowance will help to reduce the NIC liability of the company.
Tax free benefits
There are a few exemptions in relation to benefits in kind and making use of these is a way of extracting profits from the company free of tax and NIC although certain conditions do still apply to them. Some of these are provision of mobile phones by the company, meals provided on the employer’s premises, parking provided at or near the workplace or mileage allowance when using vehicles for business. This list in not exhaustive but you should seek advice from your accountant on these benefits.
The cost of acquiring pure-electric and some hybrids will usually qualify for the Enhanced Capital Allowances (ECAs). A low or zero emission car will qualify for 100 per cent first year allowance in the year of purchase if its CO2 emissions do not exceed 50g/km and is purchased new and unused.
Electric cars with CO2 emissions between 50g/km and 110g/km will attract main rate allowances currently at 18 per cent on reducing balance basis therefore it may be beneficial to purchase a new and unused electric vehicle if the cashflow permits as this will reduce the corporation tax liability or increase the tax losses that can be carried forward to offset against future taxable profits.
The director or employee provided with electric and low CO2 emission company cars will also benefit from low benefit in kind charge which is set at two per cent for 2022/2023 (one per cent for 2021/2022).
This is an exemption covering benefits not costing more than £50 and are not provided in recognition of a particular service or under salary sacrifice arrangements. Where the company is a close company, the amount that can be provided to the directors and members of their family is restricted to £300 per year and these are deductible in computing the company’s taxable profits.
Most family businesses will have a few shareholders sometimes having diverse sources of income on top of salary and dividends from the company. Where the same class of share is owned by the shareholders, with varying external personal income, dividend planning becomes difficult as the same amount of dividend would have to be paid to each shareholder and as a result some may end up paying a higher rate of tax or some may not utilise their full basic rate band.
Provided there are no immediate plans to sell the business, a way around this is to issue alphabet shares which will allow each different class of shares to receive differing amount of dividends.
The employer can contribute to an employee’s pension and is made gross and no tax or NIC is payable by the employee in respect of the contribution. The annual allowance for pension contribution is £40,000 per person and this is tax deductible when computing the company’s taxable profits. For 2022/2023 this would equate to a saving of £7,600 in corporation tax (£40,[email protected] per cent) per person contributed. Also note that any unused allowance for pension contributions can be carried forward up to a maximum of three years.
The writing is on the wall that the corporation and CGT rates are likely to increase from the current 10, 19 and 28 per cent. If you are looking to sell your pharmacy company which also has large amount of cash, other property investments or connected party loans etc, it may be difficult to sell the pharmacy company. Careful planning and restructure of the company at an early stage is recommended as there are ways to minimise and mitigate tax.
(This article is based on current practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Umesh Modi BA ACA is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or [email protected] Vinku Shah FCCA is a Chartered Certified Accountant and Manager at Silver Levene LLP. He can be contacted on 020 7383 3200 or [email protected] silverlevene.co.uk.)