Tax Saving Tips ahead of Year End 5th April 2018
28th Feb 2018
Understanding your personal allowance
Personal Allowance is currently set at £11,500 for 2017/18, everyone is entitled to this regardless of their income. Bear in mind that if your partner or spouse has little or no income you are able to use to take advantage of their personal allowance by spreading your income. You may choose to transfer your income to your partner, however, you should be aware that the legislation on ‘income shifting’ means this must be a gift with ‘no strings attached’.
Married couples may also be able to use the Marriage Allowance to transfer 10% of their personal allowance to their spouse. This allows married couples and civil partners where one earns no more than £11,500 and doesn't pay tax at the higher or additional rate to transfer up to £1,150 of their earnings to their partner, reducing a couple's tax liability by up to £230 in the current tax year (2017/18).
Incorporating your Business
You may wish to consider extracting the profits fromyour business by becoming incorporated, this could provide more scope for you to defer or save tax than by operating as self-employed or as a partner in a business. For guidance on the right choice for you, contact [email protected]
Claiming Tax-Free Allowances
As an alternative, you might want to claim tax-free allowances, such as mileage payments, which apply when your own car or van is used on business journeys. Because they are a completely separate legal entity, companies can offer a flexible option in terms of tax planning. For example, employer pension contributions can prove to be a tax-efficient way of extracting profit from your company.
Dividend or Salary?
The question of whether it is more beneficial to take dividends over a salary or bonus is very dependent upon your personal financial circumstances. We would always recommend speaking to a qualified Accountant before deciding on which way to manage your payments.
Pros & Cons
- Dividends are paid to you free of National Insurance contributions
- A salary or bonus can carry up to 25.8% in combined employer and employee NICs.
- A salary or bonus is tax deductible for the company, however dividends are not
- A salary or bonus will count as ‘relevant earnings’ for pension purposes, whereas dividends do not, which may affect pension planning
Since April 2016, the dividend nil rate applies to the first £5,000 of dividend income, however form the 6th April 2018 this will only apply to the first £2,000 of dividends paid. It could therefore prove to be beneficial to take dividends before the end of the 2017/18 tax year and forecast your tax bill for 2018/19, given the reduction in the dividend allowance.
The dividend allowance exists in addition to a taxpayer’s personal allowance and savings allowances.
For basic rate taxpayers, the rate of tax on dividend income above the allowance is 7.5%, while for higher rate taxpayers the rate is 32.5%, and for additional rate taxpayers the rate is 38.1%.
If you require further support or advice on planning strategies, please do not hesitate to call us on 0151 321 2340 or email us.