Tax Planning Time!

If you are a director shareholder of your company then you are in a good position to arrange your income for maximum tax efficiency.

With the end of 2019/20 fast approaching, what should you consider?

Well here are a couple of ideas you might want to explore:

 Tax Planning

You want to make sure that you utilise the lower tax rate bands as far as feasibly possible.

For example, you should consider extracting enough income from your company, so that together with other sources of income outside the company, the total is at least equal to the basic rate threshold.

The basic rate threshold for 2019/20 amounts to ￡50,000 i.e. ￡12,500 tax-free personal allowance together with the normal basic rate band of ￡37,500.

So if your total income for 2019/20 amounts to ￡35,000 you may wish to consider declaring a further dividend of ￡15,000 as you will only have to pay tax at 7.5%

If you and your partner own say 50% each of the shares in the company then this will give further scope to ensure that a total of ￡100,000 (￡50,000 each) is maximised and you only pay basic rate tax

Income over ￡50,000

What is the situation if your total income is over ￡50,000 and you are paying higher rate tax?

Dividend

The time you declare the dividend is important. For example, if you declare a dividend on 31 March 2020 then it will fall into the tax year 2019/20 and this may make you fall into the higher tax bracket. So, if you delayed declaring the dividend until after the 5 April 2020 then it will fall into the following tax year 2020/21 which may be more tax advantageous depending on your personal circumstances?

Equalising Estates

Transferring income yielding assets to a spouse/civil partner ensures both parties can determine how much income is assessed for each person. If one partner is paying higher rate tax and the other basic rate tax there may be the opportunity to equalise the estates so that both parties are paying tax at the basic rate?

Pension Contributions

Then you may wish to consider paying into a personal pension scheme as this could potentially save you 40% tax – good news!

Remember the pension contributions has to be paid in the tax year in order to obtain the tax relief

For example, if you paid a net personal contribution of ￡4,000 and you are a higher rate taxpayer, then you will obtain additional tax relief of ￡1,000. So your pension pot will grow to ￡5,000 and it has only cost you ￡3,000 i.e. ￡4,000 – ￡1,000. Please ensure you obtain Independent Financial Advice to consider your personal position before you make any contributions

Child Benefit

It is also important to remember that child benefit gets effectively withdrawn by 1% for every ￡100 of income earned over ￡50,000 (taking the highest earner in a household for these purposes), being reduced to nil once the income goes over ￡60,000. So personal pension contributions will appear to be very attractive if savings can be made here as well

Charitable Donations

You may wish to also consider making charitable donations as this will increase your basic rate tax threshold and potentially save higher rate tax

Allowable business loans

For example, did you acquire a loan to fund working capital for your company?

If so you may be in a position to claim tax relief on the interest you have paid

Income over ￡100,000

If your income exceeds ￡100,000 then the personal allowance is reduced by ￡1 for every ￡2 of income above ￡100,000. So it is important to consider the points above to try and bring you income below ￡100,000 in order to preserve the personal allowance. The effective rate of tax at this income level can be 60%!