2 Tax-Saving Tips for Company Directors

Originally published on Linkedin.

Small businesses are the backbone of the UK economy. They contribute massively but often endure significant hardship: new taxes, regulations, covid-19, recessions, legal battles, and inflation (the list goes on).

So, if a company director/owner wants to reduce their tax bill without breaking any rules, don't shame them—encourage them: Share this with anyone you know who might benefit.

Here are two unique ways for limited company directors to save on taxes:

Tip #1: Pay into your pension

If you want to reduce your corporation tax and dividend tax bills, your company can contribute excess profits into a pension of your choice, up to £60,000 per year. You can contribute even larger amounts if you have any unused pension allowances from the previous three tax years.

Pensions are incredibly tax-efficient: all investment growth within the pension is completely tax-free, the value of the fund is exempt from Inheritance Tax, and the first 25% of the pension (subject to limits) can be taken tax-free in retirement. The remaining 75% is taxed as and when you withdraw it in retirement, which will likely be at a lower rate than today—especially if you retire in a low-tax country.

However, company pension contributions need to meet certain criteria to qualify as allowable business expenses. It is important to check everything with your accountant or financial adviser before proceeding.

Tip #2: Take out a 'Relevant Life' insurance policy

If you already have life insurance (as most working breadwinners should), did you know you can get the same benefit by setting up a policy through your limited company instead?

Enter Relevant Life Insurance. This type of policy is designed for limited company directors, and the insurance rates are the same as for personal policies, except the premium is an allowable business expense.

Let's say your marginal rate of Corporation Tax is 25% and you are in the Higher Rate dividend tax bracket at 33.75%. This means your effective marginal tax rate is 50.13%.

If your personal life insurance policy costs £50 per month, by the time you have paid corporation tax and dividend tax, the gross cost of this would be £100.26 per month. But if you use a Relevant Life policy instead, the cost is offset against taxable profits so all your business pays is £50 per month. This is effectively a 50.13% discount!

Another benefit of Relevant Life insurance is that the policy is required to be set up in a trust, which protects the life cover proceeds from Inheritance Tax.

If you have any questions, please feel free to leave a comment or get in touch.

Disclaimer: This article does not constitute financial advice. Please speak with an FCA-regulated financial adviser before implementing any of the tips mentioned.