I deliver this tax advice service on myself
Show Me The Money
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As a business owner, I want to build a really good future for myself and my partner. That involves making sure I’m aware of all the right things so we can achieve what we set out to.
One of the ways to do this is through a Tax Diagnostic.
A Tax Diagnostic lifts the lid on everything. It explores every aspect of your business and gets you thinking about what is not only applicable now but what will be in future.
It helps from a tax planning perspective and also gets you asking the right questions, some of which you may have been overlooking until now.
It formalises the whole process, putting it all together in black and white so you can see what you’re doing well and what needs to change.
As a growing business, laying the foundations for scale, I completed the Growth Tax Diagnostic review on myself and my company. From this, three issues surfaced:
Now, this is very interesting. At the moment, I’m actually developing a system internally to manage data flow better. And there’s a good chunk of time and effort going into that!
There’s also money going into it. Essentially, the system will act as a client portal that automatically sets up and manages new clients. That way, our job is made a little easier in terms of client care. As it’s currently in development, it’s not necessarily applicable for R&D, but I want to keep it on the radar going forward as it could become eligible for a claim. That’s why it’s important for us to start tracking the project right now, so we don’t have to ‘estimate’ the time involved, and we can maximise the claim.
The government’s R&D tax incentive is one of the most valuable sources of cash available to companies; large, small and any in between. Not to mention, the scope for these credits is vast. Pick any sector and chances are there are R&D tax credits available for it. The criteria for what counts as R&D is also very extensive, from creating new products and services to altering existing products, services or processes. In other words, there’s lots to apply for from a tax perspective so I’d highly recommend any business to look into this.
Sometimes, it’s all about sacrifice when building a business. But there’s sacrifice, and then there’s smart sacrifice, which is what makes this particular tax issue so appealing. I want to be confident that I am doing everything via salary sacrifice to benefit both myself and my partner. Why not just take the money and run, you might ask?
For one, neither of us desperately need money right now. Therefore, I believe we’re both better off putting a good chunk of our salaries towards pension contributions. That’s particularly important for my business partner right now. She’s 11 years younger so has the benefit of time on her side!
So it’s a good opportunity, for her in particular, to take the money we don’t need right now and tax-efficiently extract that from the business to grow in a pension pot. As for myself personally, well this ticks one more box. As it stands, I am the main earner in my family. But what happens if I’m not the main earner? What provisions have I got for the future? It’s just more security than anything else. It’s one less thing to worry about as much.
Here’s a good tip for you. You get roughly £20 a week child benefit, for your first child. If that money is put into a pension from the day they are born, by the time they access it as 57 years old, it’s worth almost 80% of the average pension amount someone will have at retirement. I mentioned that to my mum the other day, and I gave her an earful…I could be retiring in 15 years!
Now this one’s more of an issue for me personally. As the business grows and becomes more profitable, I’ll be looking to extract that value from the business. I need to think about how to do that, when to do it by and whether it’s best done via my partner or me.
That involves my remuneration as a director. Now being a limited company means the business is a separate legal entity from myself. So unlike a sole trader, whose profit quite literally is their income, there are two main ways I can be compensated – PAYE (Pay as you earn) or Dividends. Which one or how much of each is best will depend on the tax advantages.
My financial goal really is to build that pot up. That way it can be taken out and literally, then it’s about options. Everyone has to pay a mortgage or pay rent or everything else, but the day that’s gone, you’re in an infinitely better position. At the moment, I prefer most of what I make to sit in the business, so it can be used for opportunities and better decision-making. But there’ll come a point whereby I’ll want to take that out. I don’t want the benefit of me being on the front foot to be taken out by tax, on the way out.
Currently, I’m the only director, but I do have one employee who is my better half. We should have married ages ago to be honest, but then COVID happened, and well, we’re having to wait a little longer!
As husband and wife (hopefully in the not too distant future) I need to be thinking about our income split because she does genuinely work in the business. It’s how we structure that so that we’re getting the most optimised position for us as a family.
I’m also re-doing our Wills at the moment. And while that sounds a tad grim for a sprightly 43-year-old, it’s crucial to think about how everything fits together. It’s better to get your house in order early so you can forget about it. At the risk of sounding like a very cheesy life insurance advertisement, ‘life happens’.
In fact, it would actually be nice to retire sooner. So I’m looking forward with a view to structure things so I’ve got a sellable business. How would you tax plan your way to that point? Big questions to answer for the future! In the next year or so I’ll be looking to complete the Business Expansion Tax Diagnostic to answer those very questions.
Remember, you’re not just putting all this hard work in for nothing. We can help you make sure you’re not just thinking about the NOW, but also the FUTURE.
Take a tax diagnostic with us to find out where you could be more tax efficient.
