Time for remuneration planning and profit extraction
After previously looking at the cost of standing still, Richard Bertin offers some financial planning ideas for clients with excess profits or cash in their business.
The tax reporting season for clients is hopefully in the rear view mirror and a well-deserved break has been had, or is on the way.
With only a few weeks before the tax year end closes, punctuated by half term holidays in February for professionals and their clients, and the Easter school holidays starting at the end of March for some, it leaves little time to finalise planning with some clients.
Tax year end planning needs to start early it seems.
Instinctively clients are attracted to “doing things” pre 5 April, especially, if owning a 31 March company year end. However, with changes to corporation tax, some planning is best deferred.
Electric cars
Some clients may have an order for an electric car. Typically, there is a wait period and dealers may push for a pre or post 1 March purchase, the date of the new number plate release, depending on their sales targets.
However, accountants with a good oversight over both their clients’ business and personal finances, may suggest they wait until April for their company to buy an electric car, enjoying a corporation tax break a year later, but at a higher rate.
Pension planning
Clients like making lump sum pension contributions in March. Again, consideration could be given to deferring these contributions to April. However, unlike buying an electric car, pension allowances come with a “use it or lose it” caveat. At the same time pension planning for high earners is a complex area, and is best undertaken in tandem with a qualified financial adviser.
Assuming the pension planning stars are aligned, most clients would prefer pension tax relief at 26.5% or 25%, rather than 19%.
Venture capital trusts (VCTs)
Some clients may not want to put money into a pension, or indeed are limited in their ability to do so.
For the 2022/23 Tax Year there is scope for clients to direct excess profits into a VCT, subject to appropriate regulatory advice.
Looking purely at VCT investing from a tax aspect, a client earning say £150,000 this Tax Year invests £20,000 into a VCT. Their tax to extract that £20,000 would be taxed at 33.75%, and the tax reclaim on the £20,000 investment should be at 30%, so a modest cost to extract and invest.
In the 23/24 Tax Year the tax implication looks slightly different. Next year as the additional rate reduces, that same client would suffer income tax at 39.35%, essentially an additional tax leakage of some 5.6%, for delaying a few days perhaps.
Recent government statistics revealed that the market for VCT investment saw inflows of a record £1.12bn in the 21/22 Tax Year, up 68% on the previous year.
According to Octopus Investments, this highlights that more investors are seeing the attractiveness of tax-free dividends but also that investors were prepared to direct some of their extra capital to support early-stage companies in the UK, even throughout some of the pandemic years.
Business relief
There will be clients at the other end of the lifecycle of a business, who have accumulated profits, paid Corporation Tax and perhaps be sitting on excess cash in the business, that they want to extract and keep IHT-friendly.
The tax reliefs on EIS are similar to VCT. So, in similar vein, a higher rate tax payer can extract cash as a dividend and invest in an EIS, subject to it being an appropriate investment. As before, the profit extraction this Tax Year would be at 33.75%, with an available tax deduction of 30% on EIS.
Octopus Investments notes that EIS is attractive to investors targeting more risk and more growth, not just because of the 30% tax recovery, but also because of the 40% Inheritance Tax, via business relief, the ability to defer capital gains or the potential for tax-free gains.
Remuneration planning should be fun!
It may sound trite or patronising, but clients typically work hard to reap the rewards of their effort. The difference between a good accountant and great accountant is knowing the levers of planning ahead and talking through the options with your clients, and demonstrating the benefits of having you on their personal team, not just on the ‘reporting and filing team’.