Case Study: Optimising Tax Efficiency for an Entertainment Industry Entrepreneur
Our Client:
A 40-year-old male entrepreneur in the entertainment industry operating through his own limited company, came to use for much needed wealth management consultancy.
What was the challenge:
The client was accumulating significant cash within his company each year and was unsure of the most tax-efficient way to manage it. He was inadvertently paying high income taxes by taking the cash out as a salary, pushing him into the higher tax bracket. He was then holding the remaining funds in a personal current account, not earning any interest or being invested for future growth.
Wealth management solutions:
Our wealth management team conducted a comprehensive financial review, considering the client's:
Values and goals: We explored the client's long-term aspirations, such as his desired retirement age and lifestyle.
Risk appetite: We assessed the client's comfort level with different investment options, considering his risk tolerance.
Existing assets: We analyzed the client's current financial situation, including his existing investments and savings.
Our recommendations:
Salary optimisation: We advised the client to adjust his income structure. Instead of solely relying on a high salary, he could:
Take a lower salary that falls within the basic tax rate band, ensuring he still receives National Insurance (NI) credits for future benefits.
Supplement his income with dividends up to the upper limit of the basic tax rate band. This income is taxed at a lower rate of 8.75% compared to the 20% income tax rate on salary.
Pension contributions: We recommended diverting the company's excess cash into a pension scheme through employer contributions. This offered several benefits:
Tax saving for the company: Employer pension contributions are tax-deductible expenses, reducing the company's corporation tax liability.
Tax-efficient for the client: Contributions are made before corporation tax is applied, meaning they are not subject to income tax at the point of contribution.
Outcomes:
By implementing these strategies, the client achieved significant tax savings:
Reduced income tax: The adjusted salary structure minimized income tax liability.
Lower corporation tax: Employer pension contributions lowered the company's taxable income.
Furthermore, the client started building a retirement nest egg through his pension, contributing to his long-term financial security.
Disclaimer: This case study is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor for personalised guidance based on your specific circumstances.
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