For sole traders and partnerships, income tax applies on the profit generated by the business – not on the drawings taken. For incorporated businesses (limited companies), corporation tax applies on the company’s profits. The Directors will pay income tax on their income. Part of this income may be on PAYE salary and some (if applicable) on dividends.

Corporation tax applies at 20% on taxable profits up to £300,000, with the main rate being 26% (2011/2012). Income tax at 20% for basic rate taxpayers , 40% for higher rate taxpayers and 50% for Additional Rate payers. Capital gains tax may apply on the sale of the business. To find out more about current Corporation Tax regulations visit the HMRC website.

The owners of the business should consider pension arrangements to reduce taxable profits. The advantages are:

• Mitigate a proportion of the income tax or corporation tax on the premiums / contributions made.
• Assets grow virtually tax-free.
• Extremely varied investment opportunities to include stocks and shares and cash deposits.

Investment strategy can include purchase of business premises in a tax efficient manner. The pension fund would ‘own’ the premises and rent can be charged to the company by the fund. All income (rent) received without income tax. Capital gains tax does not apply on the sale of the premises from the fund.

There are opportunities to withdraw significant levels of tax free cash from the pension fund at retirement.

Contact us for further information on how we can help.