How We Helped a Business Owner Save £38,000 Through Smarter Tax Planning
The client
Paul came to Taxflow Partners as the owner of two successful trading businesses.
Both businesses were generating profits and building up cash. Paul wanted to use some of those profits to build his personal wealth, particularly through property investment and ISAs.
The problem was that his existing structure meant he was extracting significant amounts of money from his companies personally before investing it. He was also making no pension contributions through his businesses.
The problem
Paul's businesses were performing well, but the way profits were being extracted wasn't particularly tax efficient.
To invest in property personally, Paul first had to extract funds from his trading companies, resulting in dividend tax being charged at the higher and in some cases the additional rate.
Similarly, Paul was extracting profits personally to invest into ISAs rather than considering whether some of those funds could be contributed directly from the business into a pension.
We reviewed both businesses alongside Paul's personal position rather than looking at each company in isolation.
What we recommended: a holding company and property SPV
We incorporated a new holding company and completed a share-for-share exchange, placing Paul's two trading companies underneath the new holding company.
We then incorporated a separate special purpose vehicle (SPV) for future property investments within the group structure.
This changed how Paul could approach future property investment. Instead of extracting profits personally and potentially paying personal tax before having the funds available to invest, surplus cash could be moved around the group and used to fund property investment through the SPV.
The structure also provided separation between the existing trading activities and the property investments.
What we recommended: employer pension contributions
Paul was also extracting money personally and investing some of it into an ISA while making no pension contributions through his companies.
We recommended considering employer pension contributions directly from one of his trading businesses. Rather than first extracting the money personally and potentially suffering personal tax, the company could make qualifying employer contributions directly into his pension.
This isn't to say that a pension is automatically better than an ISA. Pensions and ISAs have different tax treatments, investment rules and accessibility, so Paul's wider financial objectives needed to be considered.
For Paul, however, using the company to make pension contributions formed an important part of a more tax-efficient overall strategy.
The result
By looking at Paul's businesses and personal position together, rather than simply preparing his year-end accounts and tax returns, we were able to restructure how future profits could be invested.
Introducing a holding company, establishing a property SPV, reducing the need to extract certain funds personally before investing, and introducing employer pension contributions resulted in an immediate overall tax saving of approximately £38,000, with further savings possible depending on future property purchases.
More importantly, Paul now has a structure designed around what he actually wants to do with the profits generated by his businesses.
The bigger lesson
A profitable company doesn't necessarily mean the owner is operating in the most tax-efficient way.
For business owners accumulating significant cash, decisions around dividends, pensions, holding companies and property investment can have substantial tax consequences.
Looking at the company accounts alone isn't always enough. Tax planning should consider both where profits are generated and what the business owner ultimately wants to do with them.
Could your business structure be more tax efficient?
Our Tax Health Check reviews your company structure, profit extraction, remuneration, pensions and wider tax position to identify potential opportunities and areas for improvement.
If you're building up cash within your company or regularly extracting profits to invest personally, it may be worth reviewing whether your current structure is still the most appropriate one.