A story of tax tails and investment dogs

When it comes to making your pharmacy business as tax efficient as possible, taking advice from a regulated professional may well be a worthwhile investment, finds Adam Bernstein

There’s an old adage in the world of accounting – ‘don’t let the tax tail wag the investment dog’. In essence, we, whether as individuals or in business, shouldn’t make moves to minimise tax that might be regretted later on.

However, none of this precludes a pharmacy from doing whatever it can to lawfully become tax efficient.

David Wright, a technical officer at the Association of Taxation Technicians, thinks that tax efficiency should start with remuneration planning.

As a business grows, incorporation may be tax efficient as there are lower rates of corporation tax compared to income tax. However, as he points out, “the downside is that this introduces a second layer of taxation – corporation tax is due by the company and then personal taxes are payable on extracting profits to the owner.”

Of course, a corporate structure allows control over how much income the owner is taxed on, allowing them to maximise use of their lower rate tax bands each year. For Wright, this can be especially valuable in the event of business profits fluctuating. “It allows profits to be kept within the company in good years to reduce the owner’s exposure to the top rates of income tax,” he explains. “By comparison, a sole trader would be liable to tax on a bumper year’s profits in full.”

Wright also points out that if the company has lean years, the owner may still be able to extract company reserves as salary and dividend to make use of their personal tax allowances and basic rate tax band. But he adds this caveat: “Unlike dividends, salaries are an allowable expense when calculating a company’s taxable profits, so it may appear sensible to remunerate the owner with just salary.

However, National Insurance Contributions (NICs) apply to salaries for both the company and the recipient.” Also, dividends are not subject to NICs, and the recipient pays lower tax rates than they do on salary, which is why he says that “there is a balancing act between the two”.

It shouldn’t be forgotten that NICs provide for state pension entitlement along with other state benefits. For this reason, Wright suggests paying salary equivalent to at least the secondary threshold (£9,100) to ensure a year counts for state pension contributions, but probably no more than the personal allowance (£12,570), above which PAYE starts to be incurred.

Tax-efficient perks

Non-cash benefits appeal to employees and can be highly tax efficient. Unfortunately, Wright warns that this doesn’t apply to owners of sole traders or partnerships but does for any employees they take on.

He says that certain benefits, such as employer pension contributions and providing a mobile phone can be provided tax-free. Staff events such as Christmas parties can also be laid on tax-free as long as the total cost for all events in the year does not exceed £150 per head with the costs also claimed against the company’s taxable profits.

Cars have for years been targeted by HMRC and although electric cars can no longer be provided tax-free to employees, until April 2025 they only attract a benefit in kind charge based on 2 per cent of the list price. This means that a £50,000 electric car will result in a £200 annual tax charge for a basic rate taxpayer or £400 for a higher rate taxpayer. If the business leases the car, those costs can be claimed when calculating its taxable trading profits. “If the business buys the car outright, the full purchase cost can be claimed in the year of purchase, as long as this is before 31 March 2025,” says Wright.

Salary sacrifice pension contributions are another tax efficient option. Wright says that “if an employee gives up part of their gross salary, the employer can pay that amount into a pension scheme on the employee’s behalf, saving tax for the employee and NIC for both the employee and the employer”.

Finally, there’s the ‘trivial benefits’ rule, where rewards valued at up to £50 each can be provided tax-free to employees as long as they are not a reward for services and are not cash or cash-equivalent vouchers. Wright warns that directors are generally limited to £300 of trivial benefits per tax year.

The long term

For those looking to sell up, it’s important to think about an exit strategy, says Wright. This is because a Capital Gains Tax (CGT) charge is likely to apply, with rates of up to 20 per cent on the growth in the business value. However, he says: “If you structure your business so it qualifies for Business Asset Disposal Relief, you could access a 10 per cent CGT rate on up to £1 million of capital gains.”

And then there’s Inheritance Tax (IHT). A trading business can often qualify for 100 per cent relief from IHT, thanks to Business Property Relief, which can provide a huge tax saving if the business is to be passed on. But Wright warns that those that don’t structure their businesses carefully may miss out.

Summary

Tax is an obligation on us all, but it doesn’t, as an old HMRC advertisement notes, need to be taxing. The key is good advice from a regulated professional rather than following a course of action just because it’s tax efficient.