Navigating Share Investments: Using the personal route or buying shares through a company?
So, picture this: you’ve got a bit of extra cash lounging around, and the allure of the next Uber-style investment dream sounds promising to you. You might even be fantasising about leaving that nine-to-five grind behind. But let’s bring you back to reality for a moment – you’re here because you’re thinking about an investment, and you’re stuck between two choices: going via the personal route or through your Limited Company. Many business owners have this question when they begin investing in shares. We’re here to shed some light on what is the best choice for you.
First things first, investments bring financial return through dividends and capital value increase. HMRC treats these two money-makers differently for individuals and companies, so here’s the tax implications:
If you decide to invest personally, then you need to be prepared for dividend tax rates. For this tax year, it’s a sliding scale depending on your tax bracket:
Basic rate – 8.75%
Higher rate – 33.75%
Additional rate – 39.35%
The dividend tax allowance before you begin to pay tax is £1000 for the current tax year, from 6th April 2023 to 5th April 2024.
However, if you opt for the Limited Company route, you’re in luck – dividends are typically exempt from Corporation Tax. But what is the catch? To actually get those profits out of the company, you’d have to declare a dividend and face personal taxation as per the rates above.
However, here’s a tax efficiency tip: if you can afford to let the profits pile up within your company, then these accrued profits could be used for future investments or to finance your other business endeavours. But remember, it’s all about balance – too much investing activity might label your company as an investment company, and that brings with it some changes.
Capital investment growth
Individuals, you’ll need to pay Capital Gains Tax (CGT) when you cash in on your investment gains. The rate varies depending on the type of investment and your tax bracket. There is an annual tax-free allowance, currently at £12,570 for the 23/24 tax year. Gains below this are tax-free. If you’re a basic rate taxpayer, you pay 10% on non-property related investment gains above this threshold. Higher rate taxpayers pay 20% on the gain.
Now, let’s talk companies. They pay Corporation Tax on investment gains when they’re cashed in. It’s 19% for now for profits under £50,000, but increases to 25% for profits over £250,000. Here’s the important part – companies don’t get an annual tax-free allowance. They need to pay the full corporate tax rate on your capital gains. So, if you can make use of that annual tax-free allowance for expected gains, the personal route might be more sensible to consider for your investments.
What else to think about when buying shares through a compay?
Is the company you’re investing in SEIS or EIS qualified? These HMRC-backed schemes aim to make investing in young start-ups less nerve-wracking for you. They come with some great tax reliefs like:
- Up to 30% relief against your income tax
- No capital gains tax (usually) payable
- Loss relief if your investments go down
- The ability to carry back to the prior year for tax planning
But, here’s the catch: these tempting tax breaks are only available to individuals investing.
To sum it up, if your investment is paying you dividends then you don’t need to use the personal route in the short term – the company route might be better in this case.
If your dividend income will be more modest, but you’re expecting that investment to grow, consider going personal to get the annual capital gains tax-free allowance.
If EIS or SEIS is in the mix, it’ll likely tilt the scales toward the personal route for you.
So, there you have it. Best of luck on your investment adventure!