With only a few days left in the current tax year, as a company directors that’s enough time in which you can improve your income tax efficiency.

What steps should you be taking to achieve this?

Two-step plan

Because of tax and NI increases which happen in April there’s more talk than usual about director shareholders setting a tax-efficient level of profit and income extraction for the new tax year.  However, that’s only half the story.

In practice it’s rare that the plans made at the start of a tax year will remain ideal by the time it ends. That means now is the time to consider if the planning you did a year ago needs tweaking, for example, by taking more income from your company or making tax-deductible payments.

Using your tax-free allowance

The first step is to check that you’ve drawn enough income from your company so that together with any other income you’ve received in this tax year, e.g. rental income, bank interest, etc., it at least equals to your personal tax-free allowance of £12,570 for 2021/22. If necessary, draw more income from your company.

Using your rate bands

Next, aim to use all of your basic rate band; in England and Wales that’s £37,700 for 2021/22. As already mentioned, taking dividends is the most tax efficient for this. The tax rate is 7.5% (but 8.75% for 2022/23) until your total income exceeds the basic rate band, compared to 20% for salary or other income.

Tip. Your tax-free allowances and basic rate band can be greater than the figures stated if you pay tax-deductible expenses, e.g. pension contributions and gift aid payments. These increase the amount of income you can receive tax free or how much of it is taxable at the basic rate of tax.

Tip. If you’re in the position that you want more cash now but taking more income from your company would be taxable at higher rates, consider borrowing the cash from your company this tax year and repaying it next. This gives you another bite at the cherry to keep your income tax at the basic rate only.

For more tips and advice speak to a member of the a4c team today by calling on 01737 652 852.