The biggest expense in your life is tax.

Entrepreneurs spend hundreds of hours trying to increase revenue by 10%, but won’t spend 10 hours to reduce their tax bill by 20%. The outcome is roughly the same.

One of the highest ROI things you can do is to spend some time making sure you’re not paying any more tax than you need to.

Let me begin by saying that I believe that tax is a good thing. Without tax dollars, the society we live in wouldn’t exist and I wouldn’t be sitting here writing this.

However, I firmly believe that you shouldn’t pay a penny more than you have to.

Today I’m going to show you exactly how I save six figures every year on tax.

Disclosure

I am not an accountant, I’m not a financial advisor and I’m sure as hell not a tax advisor.

But I have paid a small fortune to those types of people to optimise my taxes.

And today I’m going to share that information with you for free.

It’s also worth noting that I am based in the UK, and so is my holding company. If you’re based elsewhere, this might not be the most tax-efficient approach for you.

This article is also for entrepreneurs. If you’re an employee, then sorry but much of this won’t apply to you.

While I believe in paying the experts to do my accounts and taxes for me, I believe that every entrepreneur should know it well enough to do it themselves if they had to. Knowing how this stuff works allows you to make better decisions and gives you peace of mind.

Company Structure

For most businesses with turnover over six figures or more, it makes sense to register as a limited company.

As a limited company, you have to pay 25% corporation tax on net profits.

To minimise the amount you pay, you should pay for all business expenses via the company.

Here are just some of the things I pay for using company money:

Business car (the car, insurance, maintenance, fuel etc)
Business travel (flights, transfers, car hire, food, drink etc)
Office-related expenses (office rent, phone, broadband, laptop, headphones etc)

When you pay for these things through the business, it reduces your profit and thus reduces the amount of tax you pay. If you pay $2,000 for a new laptop, you essentially get 25% ($500) of that back in taxes.

Personal Income

Once you have a limited company, you can pay yourself a salary + dividends.

I pay myself a salary of £12,570 per year. That’s the most you can pay yourself without paying income tax or national insurance.

You can then pay yourself up to £88,430 in dividends, taking your total earnings up to £101k per year. The first £1k of dividends are tax-free. For dividend income between £12,571 to £50,270, the tax rate is 8.75%. For dividend income between £50,271 to £125,140, the tax rate is 33.75%.

Your payable tax on £101k would be just over £20k, which means your effective tax rate would be around 20%.

Once you go above £101k, the tax starts getting a lot higher.

Unless you really need the cash for something, you’re better off not going above £101k.

Holding Companies

If your business makes more than £101k profit, you’ll be left with retained profit in the business account.

While you figure that out, put the money into a high-interest savings account to help fight off inflation eating away at it.

For most businesses, it makes sense to use the cash to help grow your business. However as my agency was very cash flow positive and the growth opportunity was limited, I had to figure out where to invest the rest of the cash.

I decided to open a holding company and transfer my shares of my agency to the holding company.

That allowed me to do two things:

1) Vote up dividends to the holding company, then use that cash to invest elsewhere
2) If I were to sell the agency, I could sell it via the holding company without paying capital gains tax and then use the proceeds to invest

Offshore Tax Havens

I have done a lot of research into tax havens and paid several international tax advisors for their advice.

My conclusion is that if you intend on spending more than six months in the UK each year, then it’s virtually impossible to legally offshore your business and reduce taxes.

If you don’t mind spending more than six months of the year outside the UK, then Dubai is an attractive option, as are a few other places.

But my opinion is that having money should give you more freedom of choice over things such as where you live, not less, and I’d never move somewhere to save on tax.

Summary

In summary, for most entrepreneurs, it makes sense to open a limited company, pay yourself a salary up to the personal allowance limit, and then pay up to £88k in dividends.

Put all business expenses on the company account to minimise your corporation tax.

Use the rest of the cash to reinvest in your business, or invest elsewhere, depending on your level of risk tolerance.

Sneak Peak

In my next article, I’m going to show you how I built my personal holding company and how I used an unfair advantage to invest my money and achieve a 50% IRR.

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