If your startup is lucky enough to produce excess profit, then it’s important to consider the most tax-efficient way to invest it. You want to use this money to make as great a gain as possible, rather than have it all swallowed up by tax and spent in a way that fails to benefit you.
Here are some of the best ways to achieve this:
Pay Your Profits Out as a Dividend
One way to use your profits is to pay them out as a dividend and incur personal taxation. However, this must be done carefully; if your dividend drawings are too high you may push yourself into a higher tax rate band.
It’s very important to monitor figures if you decide to adopt this approach. You can take salary and gross dividend earnings of up to £36,145 out of your startup’s profits before you become liable for the higher tax rate. The dividend essentially ‘franks’ basic rate tax liability, so no extra income tax is payable on the dividend income up to that figure. Thus, there is little point restricting yourself below this level (provided such substantial profits are available to you), as to do so means you won’t see any reduction in your income tax liability.
Keep the Money in the Company
Another tax efficient way to manage profits is to simply leave them in the company. Doing so has the benefit of negating further personal taxation, and has the added boon of letting the money accrue interest in your company bank account. Although this can help you to avoid liability for higher rate tax, the amount you receive in interest is unlikely to be noteworthy. However, for companies expecting a ‘slow’ year to come, it can be a good means of ensuring that you’re only liable to pay basic rate tax for the current year and the one succeeding it.
Invest in a Pension
The beauty of investing in a pension is that it is entirely tax-free, and can be done using company funds. Should you fall outside of the remit of IR35, you’ll find it’s highly tax-efficient to invest a sum of around £300 per month. Under the current pension rules, this could open you up to around 33 per cent tax relief. How? You save yourself the money that would have been payable in accordance with higher rate tax regulations, placing it in a pension fund rather than in the hands of the taxman. Bodies such as Sanlam Private Investments can be a good starting point, offering the tax advantages of pension schemes along with tailored investment advice to help maximise your company profits.
How will you choose to invest your profits?
