by TONY BYRNE, managing director of Wealth & Tax Management
WHEN running your own business through a limited company there may be times when you have little or no personal income yet your business is very profitable. You may want to keep your income low for any number of reasons such as:
- Repaying your director’s loan
- Reducing your personal tax liability
- Increasing your company’s profits to pay less taxation on the profits
- Increasing the value of your company to pay much lower Capital Gains Tax on its disposal rather than higher rate Income Tax and National Insurance on the profits
There are a number of disadvantages of this strategy. For example, it may prove difficult to get a mortgage if your income is too low and you will not be able to pay much money, if any, into a pension scheme and obtain tax relief. Fortunately, there are ways around these two obstacles.
There are some lenders who will take into account the profitability of your company rather than solely rely on your personal income, before making a decision whether or not to lend to you. There are some other criteria that are relevant such as how the company’s share capital is structured etc. Nonetheless, it is still possible to obtain a mortgage if you choose the right lender.
As long as your company has sufficient profits, it may pay up to £40,000 a year into your personal pension and get Corporation Tax relief on the pension contribution. What’s more, you may carry forward up to 3 previous tax years’ annual allowance of £120,000 (3 x £40,000) and pay this additional amount too. Again assuming there are sufficient taxable business profits. In order to pay this maximum amount into your pension there has to have been no prior pension contributions by you or your company into your pension for the 3 previous tax years too.
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*The Financial Conduct Authority does not regulate tax advice. The contents of this article are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation, legislation and regulations in the current tax year. Any levels and bases of and relief from taxation are subject to change.