Tax for business owners: What’s changing and how can they reduce their tax bill?

Kate Thurman, Wealth Planning Partner

By Kate Thurman, Wealth Planning Partner, Artorius 

With UK debt to GDP hitting the highest level since World War II, tax increases were inevitable.

Through gritted teeth, Chancellor Rishi Sunak had the unenviable job of delivering the news in both the Spring Budget and Autumn Statement.

“The government is providing business with over £100bn of support to get through this pandemic”, Sunak forewarned the House of Commons in March 2021 1 .

“So it is fair and necessary to ask them to contribute to our recovery”

Why are taxes increasing for business owners?

The ramped-up taxes will help the UK regain some much-needed revenue. The overall effect of the measures announced is estimated to be worth an additional £45 billion by 2024/25.

If forecasts are met, by 2026/27 tax as a share of the economy will be at its highest level since 1950 (36.2%).

The bad news is business owners may find themselves short-changed along the way. Especially for those who didn’t benefit from government support during the pandemic.

What taxes will change for business owners?

There will be a blend of different changes coming into force in April 2023. In some cases, personal tax allowances – such as for income and capital gains tax – will not increase until 2026.

This will boost government tax receipts by 10% and 35% respectively.

A new tax – The Health and Social Care Levy – will also be introduced this year on 6th April 2022, filling the Chancellor’s coffers by an additional £16.9 billion.

Some existing tax rates will increase too. In September 2021, Prime Minister Boris Johnson announced: “We will create a new UK-wide 1.25% health and social care levy on earned income,

with dividend rates increasing by the same amount”

The increase to dividend tax rates is expected to net another £650 million.

Hitting business owners where it hurts, from 2023 corporation tax for companies with profits   £250,000 will also increase from 19% to 25%. The old tried-and-tested approach of taking a low salary and getting paid in dividends instead might be due a re-think.

Finding the most tax-efficient way forward depends on the unique business owner. Below is a snapshot of how the increases are likely to affect self-employed individuals and business owners:

How can business owners reduce their tax bill?

Almost every business owner is likely to be affected by these changes, as well as their suppliers and customers. To batten down the hatches and keep as many resources as possible, there may be opportunities for reducing tax. Listed below are four initial ideas which may help realise some savings:

Seek bespoke tax and wealth planning advice

There is no hard and fast rule for tax efficiency. The best approach is usually found with an experienced advisor creating a tailor-made solution.

Getting excellent financial advice should be a double whammy, since the best professionals will off-set their cost with the savings they generate… it’s like they pay for themselves. What’s more, the advice should be tax-deductible.

Bringing on an expert liberates business owners to focus on their money-making work, safe in the knowledge that their hard-earned cash isn’t being unnecessarily handed to the tax man.

Consider increasing pension allocations

One way to save on income tax and national insurance contributions could be to pay more into pensions. This way business owners can extract profit, without feeling it in their corporation tax bill.

However, there are some downsides to this approach. The first is that the pension money is locked-in until retirement age – usually between the ages of 55 and 65 depending on the provider.

Another issue is that the pensions lifetime allowance froze in March 2021, and so more people will be reaching the lifetime allowance of £1,073,100.

Some business owners could also be unable to contribute further because of an existing pension protection.

Because of these reasons, it’s almost always better to speak to an expert before making changes to pension plans.

Invest in new opportunities

For business owners looking to invest for the longer term, Venture Capital Trusts or Enterprise Investment Schemes could be useful.

First introduced in 1995, these tax wrappers give investors an incentive to invest in exciting British businesses. For business owners, this could offer a welcome income tax “clawback”.

Diversify your tax portfolio

Tax planners could also take advantage of wealth management’s golden rule: diversification. Famously referred to as the “only free lunch” in finance, wealth managers will spread portfolios across a wide range of asset types, sectors and locations.

This means that if one area gets hit, the client will not lose everything. Mitigating risk is an important part of portfolio management.

And, for business owners, diversifying their tax structures could be a good solution too.

Diversifying tax structures may help to manage ‘tax risk’, and help business owners save money.

Now is the time to act

The tax impact for director shareholders is changing significantly, so a change in profit extraction strategy could be in order too.

If you’d like to find out more about how you can manage your wealth and plan your affairs, we’re just an email or phone call away.