March, the last month in the current tax year – Don’t miss out on last minute tax saving opportunities.
As a limited company director you should make time to evaluate your earnings so far this year. You can then establish if you’re able to take further advantage of the current tax rates & allowances, before they change on 6th April 2106.
We’ve written this short year-end tax planning guide to help you evaluate your current tax position.
You can then use the suggestions below to assess any tax saving options that might be available to you.
Firstly make a list of your earnings in the 2015/16 tax year.
Remember to include:
- Property rental income
- Pension income
- Self employed earnings
- Capital gains
- Interest received
- Foreign earnings
Next, work through the tax bands below to see where your income level sits:
£31,786 – £150,000
Dividend ordinary rate
Dividend upper rate
£31,786 – £150,000
Dividend additional rate
(Most people’s Personal Allowance in 2015/16 is £10,600)
Finally, using our tips below, decide what action you want to take and do it quickly, before it’s too late!
End Of Year Tax Planning
£10,600 Personal Allowance
This is the amount most people can earn tax free, between 6th April 2015 and 5th April 2016.
For most limited company directors this tax free allowance will have been used up by your monthly salary payments of £883.34. If not then consider paying yourself an end of year bonus.
Remember that you may have National Insurance to pay however.
Any unpaid expenses?
Your limited company should reimburse you for any legitimate business expenses that you have paid for personally (such as mileage, professional subscriptions, home working allowance start up costs etc).
Therefore if you haven’t repaid yourself these costs throughout the year, you can extract this money from your company now, free from tax.
Remember that all expenses must be “wholly, exclusively and necessarily” incurred in the performance of your duties, check out our Expenses Guide for more info.
Tax Free Dividends
If your only income in the 2015/16 tax year will come from your £10,600 salary and dividends then you can take up to £28,606 in net dividends without having any personal tax to pay.
Remember that dividends are the distribution of profits from your limited company – after Corporation Tax. So technically you’ve paid the tax already.
If you haven’t taken £28k in dividends and you have available profits in the company then you should consider taking the difference before 5th April 2016, especially in light of the dividend changes kicking in from April. For more information on these changes visit http://a4cgroup.co.uk/dividend-allowance-much-will-pay-tax/
Dividends are considered part of your income for personal tax purposes either when they are paid or when they are declared (the earliest date applies).
This means that you can declare dividends in the 2015/16 tax year to fully utilise your allowances, but you could actually take the money out of your business bank account in a later tax year.
£100k Personal Allowance Reduction
If your income exceeds £100,000 during the tax year your personal allowance will reduce by £1 for every £2 earned, until £120,000 which in most cases is when it’s removed altogether.
Therefore if your income levels are close to this and you would normally take dividends with your salary at the end of March, you might want to consider delaying the payment until 6th April, thereby making the dividend payment fall into the next tax year.
Of course if your earnings are expected to remain the same or even increase in the 2016/17 tax year then you push the problem forward, but this is wise tax planning if it looks like you might have some downtime!
Pump up your pension…
If your personal income is likely to push you into the higher tax band then pension contributions are a great way of reducing your liability, as well as saving for your future. If paid from the limited company they also reduce it’s Corporation Tax bill so win : win!
If you don’t yet have a pension in place and need some advice then get in touch as we work with a number of Independent Financial Advisers who would be happy to help.
Profits don’t have to be taken!
Don’t feel that you always have to remove available profits from your limited company.
If the money is not a necessity to fund your living requirements then you can leave the profits in the business and declare dividends in later months or years.
Remember if you work as a contractor then you may need to keep reserves in the business to support you in between contracts, known in the sector as a war chest for time on the bench!
How and when is personal tax paid?
If, based on the above, you have personal tax to pay then you will need to declare this in your 2015/16 self assessment tax return. This needs to be filed with HMRC, with your tax paid, by 31st January 2107.
Don’t worry we will remind you about this at the start of the summer.
We hope this information has been useful (and not too confusing).
For more information on self assessment tax returns visit the HMRC guidelines at https://www.gov.uk/self-assessment-tax-returns.