Maximising returns from your business

Written by Chase de Vere, the independent financial advice partners of IPSE.

As a self-employed individual, managing your business profits effectively is crucial for both your present and future financial well-being. This blog offers an easy-to-understand overview of how you can take profits from your business in a tax-efficient way, but we always recommend that your first point of contact should be your accountant. They can provide tailored advice specific to your situation.

At Chase de Vere, we can help you with pension funding strategies, allowing you to use your profits to support your long-term goals while minimising tax liabilities. 

Here are some key points to consider when taking profits from your business:

Paying yourself a salary

Your company can pay you a salary of £12,570. This amount falls within the personal allowance, meaning it is not taxable, assuming your total income is below £100,000.

• Tax-efficient: Wages are a tax-deductible business expense, so this salary will not be subject to corporation tax.
• National Insurance Contributions (NICs): While the company will need to pay NICs on this salary, it helps build your record for the state pension.
   

Employing your spouse or civil partner

If your spouse or civil partner has a low annual income, consider employing them for actual work they do for your company. You can pay them a salary or contribute to their pension, making use of two sets of tax allowances.
 

Dividends: A tax-efficient way to distribute profits

Once your company has paid corporation tax on its profits, you can distribute the remaining profits to shareholders (including yourself) as dividends. Here's how dividend taxation works:

• £500 tax-free allowance: You can withdraw £500 as tax-free dividends.
• Tax on dividends below £50,270: Dividends up to this threshold are taxable at 8.75%.
• Higher earnings (above £50,270): Dividends are taxed at 33.75% if your earnings are between £50,271 and £125,140.
• Top rate (Above £125,140): Dividends are taxed at 39.35%.

By employing your spouse or distributing shares to adult children, you can spread the tax burden and use multiple tax allowances to lower the overall rate of tax paid on dividends.
 

Director’s loans: A temporary solution

You may also be able to take a director’s loan from your company, offering short-term, tax-free borrowing. This option is best discussed with your accountant to ensure it suits your financial situation and repayment plans.
 

Pension contributions from your company

One of the most tax-efficient ways to use business profits is by making pension contributions. Pension payments from a limited company are considered a business expense if they meet the 'wholly and exclusively' for business purposes test. This lowers your corporation tax liability and helps secure your future.

• Tax benefits now: The company’s pension contribution reduces its corporation tax, and the pension grows tax-free.
• Tax benefits later: When you retire, 25% of the pension pot is tax-free (up to £268,275), and the remainder is taxed at your marginal rate. If you expect your tax rate to be lower in retirement, this strategy becomes even more attractive.
   

Planning for the future

It's essential to have a long-term financial plan in place. While you’re focused on your work now, ensuring that you’ve made tax-efficient use of your business profits can secure your financial future, especially in retirement.

The current minimum pension age is 55, but this will rise to 57 from April 2028. It’s worth keeping these timelines in mind as you plan ahead.

If you’d like to discuss how to make the most of your pension and profits, book a free initial meeting with a Chase de Vere adviser. We’ll help you explore pension funding strategies and tailor your plan to meet your future goals.

Please note: Tax planning is not regulated by the Financial Conduct Authority (FCA). This article is for general guidance only and should not be taken as advice.