Family Business Tax Planning
Running a family business is not without its risks. Personal and professional relationships can clash and certain skills may be lacking. That said, family businesses can be highly successful with the right level of commitment, structure, incentives and goals. One thing to keep in mind at all times is family business tax planning. This will help you to meet your tax liabilities, save money and operate in the most tax savvy way possible. While family business advisors are always on hand to help with tax issues, here are some important things you should know.
Your Business Structure Matters
The way you structure your business will have tax implications – some good, some less welcome. So, you must consider whether to operate as a sole trader, a partnership or as a limited company. The latter offers the most tax benefits. For example, you’ll be able to add shareholders to the company who are entitled to dividends if the company is in profit. While tax is still payable on dividends received, dividends are taxed at a far lower rate than income tax which would apply to salaries. What’s more, shareholders are entitled to a tax-free dividend allowance each year. The tax-free dividends allowance has been reduced, however, from £2,000 to £1,000. It’ll be reduced further to £500 from 6 April 2024.
With this in mind, it’s well-worth speaking to expert tax advisors who will be able to help you set up the most tax-effective business structure. Family business tax rules can get complicated, but there’s no need to go it alone when advice is available.
Paying a Salary to your Spouse of Partner
Family members can only take dividends if the company is in profit. This is not the same for salaries which can be paid out regardless. Paying a salary is also a tax-deductible business expense which means it reduces your corporation tax. All employees must be enrolled on the payroll and make tax and NI contributions at source where necessary. So long as they’re being paid above the NI threshold of £242 a week, you’ll be able to claim Employment Allowance (EA) which will help reduce the company’s NI liability.
Pension Payments and ISA Funds
Relying on one income stream can be somewhat unnerving. That’s why it’s a good idea to make the most of individual incentives too such as private pension contributions. Any pension paid as part of a workplace pension scheme is subject to tax relief and is further tax deductible for the company. You should also take advantage of your annual tax-free ISA allowance which will help progress individual savings. For the current 2023/24 tax year, the maximum you can save tax-free in an ISA is £20,000.
Are There Tax Benefits to Employing Your Children?
If you want to bring your children into the family business, that’s great, but there aren’t any real standout tax benefits other than that their salary is tax-deductible for both limited companies, partnerships and sole traders. If they’re your only employees and are earning over the NI threshold then, again, you’ll be eligible to claim the EA.
Setting up a family business while meeting your tax liabilities in the most cost-effective way can be challenging. So, speak to Ibiss & Co today for reliable advice. With offices in Barking, Tooting and Walsall, we’re here to help.