So, you’ve started a business, and everything is going well. You’ve found ways to offer an efficient service, keep your costs to a minimum and maximise your profits. For all intents and purposes, you have a successful company that’s making you money. However, after spending so much time focusing on the financial aspects of your business, you’ve neglected your own personal finances.
Managing your money as a self-employed person can be tricky. As a business owner, you don’t get a wage slip every month. This, in turn, means your tax isn’t calculated for you automatically. The good news is that your efforts streamlining the financial side of your business haven’t been wasted. Indeed, when it comes to your own wealth, you can use your business skills. To put it another way, you use various financial mechanisms to become more tax efficient
Become a tax efficient individual
In all likelihood, you run a limited company with a dividend structure. This means you’ll receive a monthly income as well as lump sums of cash known as a dividend. This can be a tax-efficient way to run a business, but it’s what you do with your money afterwards that also matters. If you’re not managing your personal money in the best way, it almost doesn’t matter how successful your business is because you won’t be maximising your own wealth.
From a business perspective, creating a limited company and taking dividends can be tax efficient. A limited company has to pay corporation tax. However, on a personal level, there is an annual dividend allowance in the UK of £2,000 for 2020/2021. This allowance goes along with your personal allowance (£12,570 for 2020/2021), which effectively gives you more relief. So, you’ll pay 7.5% tax on dividend payments for the year 2020/2021, if you’re a standard rate taxpayer.
Thus, you’re paying less on this part of your personal income than if it were classed as standard earnings (7.5% vs. 20%). That’s great, but it’s not the point we’re driving at here. To be truly tax efficient on a personal level, you need to know what you’re doing with your money that’s in your bank account. In other words, you need to think about investing some of it to beat inflation and maximise your income.
Save money efficiently
Putting aside the matter of business taxation, it is also important to consider how this impacts you on an individual level. One possible solution is tax efficient products, such as an ISA. Individual savings accounts (ISAs) were launched in 1999 and replaced Personal Equity Plans (PEPs) as well as Tax-Exempt Special Savings Accounts (TESSAs). Since then, they’ve become a way for people to save money and not pay tax on any interest earned from the ISA. This becomes a particularly attractive proposition when you consider stocks and shares ISAs.
These accounts allow you to make investments with your savings and not pay capital gains tax on any profits made within the ISA wrapper. Of course, all investments are a risk, and you can lose money. However, stocks and shares ISA does allow you to avoid capital gains tax on shares you sell and, moreover, dividend tax.
Maximise your money with the right ISA
As a savvy entrepreneur, you can take this tax efficiency exercise a step further and choose the most efficient stocks and shares ISA. The market has evolved markedly over the last two decades. Today, you can hold multiple ISAs. However, your annual allowance of £20,000 (2020/2021) is static and you can only subscribe to one ISA of each kind per year. Therefore, what you can do is spread your allowance across multiple providers or choose one with the lowest charges.
There are various brokers available who offer different rates. If you compare the ISA fees charged by different providers, for example, you’ll begin to see how shopping around for a can further improve your tax efficiency. Indeed, some companies charge a monthly account fee but don’t charge anything for trades, even on fractional shares. In contrast, other brokers will apply a dealing commission per trade, and without the option of holding fractional shares. Therefore, it’s worth reviewing all the ISA accounts out there and the features you get before you start investing.
The point here is that stocks and shares ISAs can be a great way to invest the money you make from your business. They’re tax-efficient and, if you make the right investments, you could increase the value of your holding. When you combine all of this with the right provider, you can limit your expenses (i.e., losses) even further.