Strategies for Tax-Efficient Saving in a Limited Company for Future Asset Purchases

Saving money within a limited company for a significant asset purchase can create a tax challenge. Many business owners worry about paying extra tax on profits held in the company before they buy the asset. The key question is how to plan effectively so the company retains funds without triggering unnecessary tax liabilities. This post explores practical strategies to help limited company owners save tax-efficiently while preparing for a major purchase.

Understanding Tax on Profits in a Limited Company

When a limited company makes a profit, it must pay corporation tax on that profit. In the UK, the corporation tax rate is currently 25% for companies with profits over £250,000 (as of 2024). Smaller companies with profits below £50,000 pay 19%, with a tapered rate in between. This means the company’s retained earnings are already taxed before any money is withdrawn.

If the company keeps profits to save for an asset, the tax on those profits is unavoidable. However, the concern often arises when the owner wants to extract money from the company, as this can trigger additional personal tax.

Key points about company profits and tax:

• Corporation tax applies on profits before any distribution.

• Retained profits can be used to buy assets directly through the company.

• Taking money out as dividends or salary triggers personal tax.

  
  

Understanding this distinction helps in planning how to hold funds and when to extract them.

Buying the Asset Through the Company

One of the simplest ways to avoid extra tax is to purchase the asset directly through the company. When the company buys an asset, it uses its after-tax profits, but the purchase itself is not a taxable event.

Benefits of buying the asset through the company:

• The asset becomes a company asset, which can be depreciated or claimed as capital allowances.

• No personal tax is due on the purchase.

• The company can claim tax relief on the asset’s cost over time.

  
  

For example, if a company saves £100,000 in profits after corporation tax, it can spend that £100,000 on equipment or property without further tax. This avoids the need to extract money personally and pay income tax or dividend tax.

Using Capital Allowances to Reduce Taxable Profits

Capital allowances allow companies to deduct the cost of certain assets from their taxable profits. This reduces the corporation tax bill.

How capital allowances help:

• When the company buys qualifying assets, it can claim a percentage of the cost as a deduction each year.

• This lowers taxable profits, reducing corporation tax.

• Some assets qualify for the Annual Investment Allowance (AIA), allowing 100% deduction in the year of purchase.

  
  

For example, if a company buys machinery costing £50,000, it may claim the full amount as a capital allowance in the first year, reducing taxable profits by £50,000.

This strategy encourages companies to invest profits in assets rather than holding cash, which is taxed without relief.

Planning Withdrawals to Minimize Personal Tax

If the business owner needs to access funds before buying the asset, careful planning can reduce personal tax.

Options include:

• Taking a salary up to the personal allowance limit to avoid income tax.

• Paying dividends within the dividend allowance to reduce tax.

• Using director’s loans carefully, but be aware of tax implications if not repaid.

  
  

For example, an owner might take a small salary of £12,570 (personal allowance) and dividends up to £1,000 (dividend allowance) tax-free. Beyond that, tax rates apply.

Balancing salary and dividends can optimize tax efficiency while keeping funds in the company.

Holding Funds in the Company Account

Keeping profits in the company bank account is common when saving for a big purchase. While corporation tax is paid on profits, no further tax applies until money is withdrawn.

Advantages of holding funds in the company:

• Funds are ready for asset purchase without personal tax.

• The company can earn interest on retained cash.

• Avoids triggering dividend or income tax prematurely.

  
  

However, holding large cash balances may attract scrutiny from HMRC if the company is seen as hoarding profits without a clear business purpose. It’s important to document plans for the asset purchase.

Using a Separate Savings Account for the Company

Opening a dedicated savings account for the company’s funds earmarked for the asset can help track progress and keep money separate from daily expenses.

Benefits of a separate account:

• Clear visibility of funds saved for the purchase.

• Easier to manage cash flow and avoid accidental spending.

• Helps demonstrate to HMRC the purpose of retained profits.

  
  

This simple step supports disciplined saving and transparent accounting.

Considering Timing of the Asset Purchase

Timing the purchase can impact tax efficiency. For example, buying an asset before the end of the company’s financial year may allow claiming capital allowances sooner, reducing tax in that year.

Tips on timing:

• Plan purchases to maximize use of Annual Investment Allowance.

• Consider the company’s profit cycle to offset profits with asset costs.

• Avoid delaying purchases unnecessarily, as holding profits longer means paying tax on cash not yet invested.

  
  

Good timing aligns tax relief with company profits for maximum benefit.

Example Scenario

Imagine a limited company with £150,000 profit after expenses. The owner wants to buy a £100,000 machine but is worried about tax.

• The company pays 25% corporation tax on £150,000, leaving £112,500.

• The company buys the machine for £100,000 using retained profits.

• The machine qualifies for AIA, so the company claims £100,000 capital allowance, reducing taxable profits next year.

• The owner leaves the remaining £12,500 in the company for working capital.

• No personal tax is due because the owner did not withdraw funds.

  
  

This approach saves personal tax and reduces corporation tax in future years.

When to Seek Professional Advice

Tax rules can be complex and change frequently. Each company’s situation is unique, so consulting an accountant or tax advisor is wise. They can help:

• Structure salary and dividends tax-efficiently.

• Plan asset purchases and capital allowances.

• Ensure compliance with tax laws and avoid penalties.

  
  

Professional advice ensures the best strategy tailored to your company’s needs.