Tom Walker, Partner at Wellers, the small business accountants, discusses how business owners can minimise their tax liability following changes to capital gains tax and dividends.
This April has marked the change of several pieces of tax legislation, including a reduction in the tax-free allowance for capital gains tax (CGT) and dividends. The new legislation sees the tax-free allowance halved for both taxes, meaning impacted business owners are likely to endure increased tax liabilities. However, it’s not all doom and gloom as there are plenty of potential strategies that can be implemented to help business owners, like yourself, be more tax efficient.
Reduced capital gains tax
CGT is paid when an asset, such as a property, business, shares, investment funds or even valuable items, is sold. 
Tax is calculated from the profit made in the transaction or based on increased value during the period of ownership.
From April 2024, individuals will be limited to £3,000 tax-free rather than the £6,000 previously allowed. Hopefully, you made the most of the £6,000 allowance before the 5 April end of tax year deadline, but if you didn’t, there are plenty of ways to ensure assets are being sold in the most tax-efficient manner feasible.
One potential solution is to split assets between spouses. As CGT is calculated on individual gains, splitting profits is a great way to boost the shared tax-free allowance. Another option is to strategically plan when the sale of an asset takes place based on peak values, so as to hopefully reduce the amount of tax incurred over time. Similarly, the realisation of gains can be spread across multiple tax years to take advantage of the annual exempt amount in each year.
An experienced accountant will be able to offer advice on the best times to sell, as well as offer recommendations on available relief such as Business Asset Disposal Relief (BADR).
Reduced dividend allowance
The tax-free allowance for dividends has also been cut, and it now stands at £500. The lowering of this figure will undoubtedly have an impact on small business owners and investors, as well as those in retirement or with limited incomes. The good news is there are three main ways to manage dividends to make payouts more tax-efficient, consider the following:
- Investing in an ISA
- Devising a Dividend Reinvestment Plan (DRIP)
- Staggering business investments
All three options can be a huge potential help in reducing your tax exposure. The first option, to invest in an ISA, is favoured by many. Investment ISAs are tax-free, making them a great way to reduce tax bills whilst earning more from the dividends invested. It’s worth noting that ISAs have a tax-free threshold, so if you are already investing heavily in an ISA, you may need an additional strategy for dealing with your dividends.
This could come in the form of a DRIP, which sees dividends automatically reinvested into the business instead of being paid out. Where DRIPs are available, they allow shareholders to increase their future returns without paying tax in the short term. However, this isn’t possible in all businesses so it’s best to be prepared if reinvestment isn’t an option.
If you are a shareholder in multiple businesses, you may consider staggering investments to spread dividend payments across the year. This could drop your dividend earnings below the £500 threshold, therefore saving you money on tax.
Strategies for limited companies
Whilst these tactics are helpful for individuals investing in companies, dividend payouts are much more likely to be over the threshold for Limited Company owners. A more drastic approach may therefore be needed. The easiest way for business owners to reduce the amount of tax paid on dividends is to create a balance between salary and dividends. Although your salary will be subject to income tax and national insurance, taking less in dividends and a higher wage might prove more tax efficient in the long run dependent on your personal financial circumstances.
There is no one-size-fits-all answer as everyone’s business and personal affairs are likely to be different. So, it’s best to consult with a tax advisor who can recommend the best course of action for you.
Another great way to reduce your tax bill is to increase your pension contribution. Adding to your pension pot is tax-free and reduces your taxable income from your business profits. Saving for the future and paying less tax – it’s a possible no-brainer.
Managing your money
There is no doubt that halving the allowance for capital gains tax and dividends will impact business owners. However, the scale of the impact will depend on how owners choose to tackle the change. By implementing some tax-efficiency tactics you could significantly reduce your tax liability. Understanding how to make the new allowance work for you can be confusing so it’s best to consult with a tax advisor to provide you with the specialist guidance you need.