How to pay tax at 10%

May 8, 2012

If I was to ask you, “what rate of tax do you pay”, you probably wouldn’t answer 10% (because the chances are that is not the correct answer).  However, there is a way to only pay 10% and it is relatively simple (although not easy!)

The government has been increasingly keen to reward entrepreneurs and investors in business by making the tax on investment and selling businesses increasingly attractive.  So much so, that there is a way to only pay 10% on significant earnings and by significant earnings I am talking £10 million.  It was originally £5 million but this has now been doubled.

Here’s how to do it.

1. Start a company
2. Have another source of income which is not from the company you have just started (crucial)
3. Take no money from your company for yourself….ever (hence step 2 is what you will live on)
4. Grow the business rapidly
5. Sell the business for £10 million
6. Pay tax at 10% using entrepreneurs relief
7. Pocket the remaining £9 million

Good eh?  Okay, it’s not technically correct.  You have to rely on income outside of the business and you will be paying tax on this income.  Also, presumably profits will be made every year (for you to eventually sell a company for £10 million) and corporation tax will be charged on these profits.  The corporation tax will be 20% and this will be every year and could increase if your profits go over £300,000 a year.

But taking both of these things into account, it’s still true to say that you only pay 10% on the capital growth of the business that you have started.

You don’t even have to just have one business.  You could grow several businesses and sell them and be taxed at 10%.  The catch is you have a lifetime allowance to use the entrepreneurs relief (which gives you the 10%) of £10 million.  If you go over this, you will be taxed at higher than the 10%.

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