Planning for the end of the tax year

As we approach the end of the tax year in the UK, its worth taking a few moments to see if there is anything you can do to make the most of your tax allowances and potentially save yourself some tax.

First of all a reminder that we are looking at tax year 2016/17 which runs from 6th April 2016 to 5th April 2017 so we are interested in your earnings in that period.

As we work with predominantly owner managed businesses we have focused here on planning for salary and dividends. If you have other sources of income please speak to your accountant.

Okay so let’s break this down into the different level of earnings:

If you earn less than £11,000 per year:

You will not pay any tax as all your income falls below the tax thresholds.

If you earn between £11,000 and £43,000:

You are a basic rate taxpayer.

The first £11,000 you earn is tax free.

If you receive dividends the first £5,000 of dividends is also tax free.

Additional dividends that take you up to the £43,000 will be taxed at 7.5%.

If you have other income such as rental income this will be taxed at 20%.

If you have available profits in your company but no cash you can declare a dividend to take you up to the £43,000 threshold taking full advantage of the 7.5% tax band, the company will owe you this money which you can then withdraw tax free at a later date. To do this you will need to complete a dividend voucher and put the entry through your accounting system.

For owner managed companies we recommend the following structure (assuming no other income).

Salary £8,060

Dividends £34,940

Total £43,000

This way your tax bill will be £2,025 for the year

You earn between £43,001 and £150,000:

You are a higher rate tax payer

The first £11,000 you earn is tax free.

If you receive dividends the first £5,000 of dividends is also tax free.

Additional dividends that take you up to the £43,000 will be taxed at 7.5%.

Dividends taken once your earnings are above £43,000 will be taxed at 32.5%

If you have other income such as rental income this will be taxed at 20% in the basic rate and 40% in the higher rate.

You earn between £100,001 to £122,000:

Once you start to earn over £100,000 you start to lose your £11,000 personal allowance. Which makes each pound earned in this bracket effectively taxed at a very high rate. Consider delaying dividends into the new tax year or making a larger pension contribution before 5th April 2017 to keep below £100,000.

You earn over £150,000:

You are an additional rate tax payer and will pay tax at the highest rate which is 38.1% for dividends and 45% for most other income.

It is worth looking to see if you can defer any income into the next tax year.

TIP: If you are a higher rate or additional rate taxpayer, paying into a personal pension scheme may reduce your tax bill as it extends the basic rate band so more of your income is taxed at the basic rate rather than the higher rate. We recommend speaking to your financial adviser if you wish to do this and soon as it must be done before 5th April 2017.

If you are unsure about any of this its definitely worth speaking to your accountant, don’t forget to get your figures up to date first though so you know where you are at!