Michelle Rodger: Give yourself a bumper bonus to beat Budget blues

Published on Saturday 13 March 2010 14:19

INCOME tax will undoubtedly be on the agenda when Chancellor Alistair Darling reveals his pre-election Budget in a couple of weeks' time.

A little bird tells me that Darling will announce plans to simplify the income tax form so it will consist of only three parts:

1. How much did you make last year?

2. How much do you have left?

3. Send amount listed in part two above.

Not that funny, really. At the end of a tax year which will not have seen vast quantities of surplus cash remaining in business bank accounts, it's that unpleasant time to 'fess up and part with the government's share of your hard-earned pennies.

Or not.

For those of you who have managed to make a profit, there's still some time to try to squeeze some more value out of it before 6April. And even for those of you who haven't, but intend to do so next year, there are some really interesting financial opportunities that could benefit you and your business, rather than the taxman.

It would be nice to pay our taxes with a smile but, unfortunately, the Inland Revenue only accepts money. So, in the absence of such a simple alternative, I suspect the most favourable option offered by experts is to pay yourself an enormous bonus and then draw on the funds over the coming year.

No, this isn't a joke; say for example you have a lump sum of 100,000 sitting in the bank then why not pay yourself a 250,000 bonus, use the 100,000 to pay tax and NI, and use the 150,000 as a director's loan which can be drawn down whenever necessary? According to David van der Hoeven, director of Clark Gillone, it's a sensible option for those fortunate enough to have a nice surplus of funds.

Van der Hoeven also suggests that co-directors whose business owns their property and who have funds in pensions consider using the pension fund to purchase the property for themselves. And if your business has an international focus, what about buying dollars before sterling struggles to maintain its current value as is predicted? Before April, there are actually many opportunities to choose from, but perhaps not for much longer after that.

The recent economic upheaval is about to be further compounded by political upheaval and the only thing the experts are absolutely sure about is that taxes will go up.

"You might not like the current tax regime but it's as good as it's going to get," warns van der Hoeven. "Companies need to get a wee bit more cute about how they manage their money. NI is becoming a real problem for employers, it's one of the taxes everyone forgets about. It's taxing us around the edges, so cute schemes that avoid it can be good for employers and employees."

Morag Page agrees. According to the Scott-Moncrieff director there is a brief window of opportunity and no-one knows what's around the corner. "While we can say with certainty what you can do between now and 5 April, what happens beyond that is anybody's guess," she says. "If you do something concrete this year at least you know what the consequences will be."

Her tips for "something concrete" include salary sacrifice and making financial preparations for an exit strategy.

The notion of sacrificing cash salary for some other form of remuneration is underused by small businesses, says Page.

Giving up cash on a month-to-month basis in exchange for child-care vouchers (55 per week tax and NIC free), pension contributions or even things such as the Cycle to Work Scheme, can be really tax efficient for both employer and employee. The best remuneration strategies can be used to attract and retain key staff as well as minimising the amount of money due to the taxman.

And, according to Page, entrepreneurs looking to exit their business should act soon to start squirrelling away money for the future; an additional bonus or dividend payment now would be a wise move, since higher rate taxpayers will no longer pay 25 per cent of a net dividend they receive but 36.1 per cent from 6April.

"I know entrepreneurs who want to build a business, sell it on and do something else," says Page. "Their whole vision is driven by how to get as much money out as tax efficiently as possible, and taking rewards on the way in the future will perhaps not be as tax efficient."

But whether cash is tight or earning interest in the bank, the panic to make the most of your money at this time of year highlights the importance of looking at money management as a key part of the overall business strategy and planning process; discussed and deliberated throughout the financial year, preferably not left until the last minute.

It's not about keeping as much money as possible from the taxman (well, not entirely): clever money management, identifying the opportunities to be creative with your money, knowing where to look for innovations in money management and the importance of sharing some of the profits with staff as incentives as well as being financially astute, is just good business practice.

On a final note, I'm proud to say I still have the first pound I ever earned. The government has everything else.