I was having a discussion recently with a potential client and as is my custom I presented to them the most tax efficient way to withdraw funds from their limited company using a few income level scenarios.
Both directors were quite surprised at the amount of tax they would be able to save using the most efficient strategy. On one hand they were a bit incredulous that their previous accountant had not even mentioned that they have options, on the other they were not sure where they stand from legal and even moral point of view.
I am quite used to explaining the legal point of view but the moral standpoint is not something I get asked often.
I like to think of tax savings strategies in 3 distinct categories:
- Tax evasion – illegal and immoral – examples can range from small scale understatements of personal income to complex overseas arrangements hiding billions
- Tax avoidance – legal but arguably immoral – these are the designer tax schemes used by the wealthy and big corporates that take advantage of legal loopholes in the tax system. Think David Cameron’s offshore funds and Google’s UK corporate tax bill.
- Tax optimisation – legal and moral – these are the intentionally designed intricacies of the tax system that an experienced practitioner can use to minimise the tax exposure for their clients in a way that is consistent with the nature of the law, not just the letter.
As a simple example we can take the choice of paying salary or drawing dividends for director owned small limited companies. Despite the April 2016 dividends regime changes, in most circumstances it is still much more attractive to pay directors minimal salary and rest in dividends compared to drawing a larger salary.
This is clearly something the Chancellor is aware of and if he chooses so can eliminate with legislation. The point here is the lower tax you pay as entrepreneur is designed to encourage people into this inherently risky activity which has broad positive impact on the economy and employment level as a whole. By being in business you are creating multiplication effect that increases GDP, creates job and ultimately brings more tax to the government.
So there you go – feel good about saving tax – the Chancellor wants you to, your Country wants you to, and your Accountant wants you to!