'With the end of the tax year approaching, now is the perfect time to ensure you minimise the amount of personal tax you need to pay. This article explains how you can do this, to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2016/17, and will also explain how to make the most of the tax planning opportunities you have available.
The current 2016/17 tax year started on 06 April 2016, and will finish on 05 April 2017.
Most of our clients receive personal income from their business in the form of salary and dividends. Any personal tax payable on the salary is deducted by your ltd company through the usual payroll channel, but dividends are not taxed at source like this.
The 2016/17 tax year was the first year under the new dividend tax rules, as a quick recap:
From April 2016 a new £5,000 tax-free dividend allowance for all taxpayers, accompanied by increased tax rates on dividend income, was introduced. You’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band (was 0% last year)
- 32.5% on dividend income within the higher rate band (was 25% last year)
- 38.1% on dividend income within the additional rate band (was 30.56% last year)
The allowance is available to anyone who has a dividend income. Please see our guidance here
.(1) Work out what your total earnings are to date
If you have received dividends from your company for the current tax year, you need to consider your overall personal earnings from ALL sources, to determine if you face a personal tax charge on those dividends, and which tax band the dividends will fall into. Other earnings sources can include salary from other employers for 2016/17, rental income, foreign income, or bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £11,000, then you will face a personal tax charge on any dividends you received from your limited company above the £5,000 allowance.
We have developed a simple but effective way of tracking your personal earnings position. What you need to do is;
a. Go to your My Earnings
page, and complete/update Section 2 2. Personal income from other sources for 2016/17
with any personal earnings you received OTHER THAN from your own limited company;
b. Also ensure Section 4 Last 6 payments recorded as made to your personal account
is completely up to date with all payments you have made to yourself for the tax year (if you are a Club Gold client, and your bank statements are sent to our office, we will have this up to date for you up to your most recent statement we hold – you may still need to add in any recent payments you have made to yourself);
c. Section 1 of your My Earnings
page will then calculate an assessment of your personal tax position, and calculate what personal tax charge you face on the dividends you received;(2) Paying yourself too little
Make sure you have utilised your £5,000 allowance for the current tax year. You will also need to do a little forward planning here. If you have NOT used up your basic rate band in the current year, and you are expecting to require more income in the next tax year (maybe you are planning a house extension or a long holiday), rather pay more dividends in the current tax year, at the 7.5% rate, than push over into the 32.5% band next year.(3) Paying yourself too much
If you have earned over the basic rate band, and want to limit the dividend tax charge you face, you can;
- Stop paying yourself altogether from your ltd company until 06 April 2017;
- If you can’t live without some personal cash flow, then consider loaning yourself money from your ltd company, and then after 06 April 2017 repay the loan back to the company;
- If you can’t live without some personal cash flow, then you could also consider drawing some hard earned goodwill from family / friends until 06 April 2017;
There is a caveat here though. If you have surplus Retained Earnings, but you don’t think you will need these funds in subsequent tax years, leave them in the business until you close down your company. There are still attractive tax reliefs available for extracting funds from your business when closing down.(4) Retained profits
This is very important – don’t skim-read this section. The above two sections talk about being paid dividends from your company. You can ONLY do this if your company has sufficient retained profits to pay out a dividend.
Your retained profits is not simply the money left in your company bank account – some of that will be needed to pay your company tax bills.
- Dividends can only be paid out of after-tax profits;
- Your company retained profit is your company bank balance less any tax liabilities it faces to date, such as Corporation Tax, VAT, and PAYE/NI.
Provided all your bookkeeping entries are up to date, the P&L Summary on your homepage calculates how much retained profits you have (called ‘Retained earnings’). Use this to determine if you can make further dividend payments for the tax year.
For our Club Gold clients if you are at all unsure about your level of retained earnings then please call/email us. For our Gold clients, the company retained earnings is only calculated once a year (at the company year end) which makes this form of tax planning very difficult. If you think better tax planning would be useful, we recommend you switch up to our Club Gold service.(5) Actual payment of dividends
If you are wanting to plan your dividend payments to ensure you get as close as possible to the basic rate limit, then for simplicity we suggest you ensure the dividends are paid on or before 05 April 2017
.(6) Planning ahead for 2017/18
By now you should have your head around the new figures, and dividend taxes. Two important points to remember with this:
- You will most likely have a tax bill for the 2016/17 tax year. If this tax bill is more than £1,000 (due to tax on dividends) you will be required to make payments on account for the 2017/18 tax year.The payment on account is equal to the tax owing for the 16/17 tax year, and split into two payments. One due on 31-Jan-18 and the other on 31-Jul-18. This is going to be a massive tax flow knock, at first, but remember, you are paying your tax in advance with this. So once your 17/18 return is submitted, you will only be paying any additional tax due, plus the following tax years payments on account.
- If you have a loan, taken after 6-Apr-16 which is not repaid within 9 months of your year end date, the temporary S455 tax that you are going to need to pay will be at 32.5% and not 25%
The higher earnings threshold for the 2017/18 tax year is £45,000. We are advising a monthly salary at £680 (You will be prompted to do this when you log in to your new account after 5 April 2017). At this rate you will avoid paying both PAYE and NI. The dividends that you will then be able to take for the year, paying no personal tax, will be £8,340. All dividends over this will incur tax at the relevant rates.(7) Extra bits to consider now
Trivial benefits in kind – There is the possibility of getting an additional £300 out of your business using the trivial benefits – if you need more information, as there are requirements to be met here, please get in touch.
You can (and should) split income producing assets with a spouse or partner to reduce or share the tax bill.
Use Gift Aid donations to increase your basic rate limit.
- There is a 0% savings tax band of £5,000 and a new 0% personal savings allowance of £1,000 for basic rate payers and £500 for higher rate payers.
CGT rates reduced to 10% for basic rate taxpayers and 20% for higher rate taxpayers. This excludes residential property gains.
Make pension contributions directly from your company to your pension pot – this is a great way to get funds out of the company, as the contributions will be a tax deductible expense. Always ensure that funds clear bank accounts by 05 April 2017. And bear in mind that funds moved to your pension are tied up until retirement.
There are also the following Pension changes from 2016/17:
- The lifetime allowance is reduced from £1.25 million to £1 million
- You will be able to contribute a maximum of £40,000 to your pension for 2016/17. This annual allowance will reduce by £1 for every £2 that an individual''s income exceeds £150,000, down to a minimum of £10,000 for individuals with income of £210,000 or more.
Child Benefit claimants and their partners need to consider the £50,000 band because the High Income Child Benefit Tax Charge (HICBC) applies. Where the HICBC cannot be avoided consider making an election to no longer receive Child Benefit, as this may spare any need to file a tax return.
Remember – If your income exceeds £100,000; £1 of the personal allowance is clawed back for every £2 of income over the £100,000 mark, until your personal allowance is reduced to £0.
An ISA (Individual Savings Account) is a tax-efficient way to save or invest.
- Have you used up your ISA limits for the year?
- Have you considered funding an ISA for children or grandchildren?
- Have you considered a Junior ISA for children under 18 without a trust fund?
- Have you started a Right to Buy ISA for the children?
Sheltering capital gains and income tax relief
- Investment in an Enterprise Investment Scheme (EIS) company provides income tax relief at 30%. Gains can be deferred if reinvested in an EIS from one year before to three years after they arise.
- Investment in a Social Enterprise provides income tax relief at 30%. Gains can be deferred if reinvested in an EIS from one year before to three years after they arise. Social Investment Tax Relief (SITR) is available for investment in debt as well as shares.
- Investment in a Seed Enterprise Investment Scheme (SEIS) company can be up to £100,000 per year, and provides income tax relief at 50%. Capital gains made in the same year as the SEIS investment can be deferred.
- Deferred gains made on or after 3 December 2014 retain eligibility for Entrepreneurs'' relief when invested in EIS, SITR and SEIS.
- Investment in a Venture Capital Trust (VCT) provides income tax relief of 30% on investments up to £200,000. VCT dividends are tax free and the investment can be cashed in tax free after 5 years. Capital gains tax deferral is not available for VCT investments.
Not UK resident? Don''t forget the timing of capital gains: gains accruing on the disposal of UK residential property are from 5 April 2015 subject to CGT.Coming in April 2017:
- Lifetime ISA
- Two new tax-free £1,000 allowances – one for selling goods or providing services (like Etsy), and one for income from property you own (such as letting through Air BnB).