We’re approaching the end of the current tax year.
What tax savings strategies should you be considering before 5th April 2019?
If you are a limited company director then find time in March to review your income levels so far this year.
You can then establish if there are any remaining tax rates and allowances available to use, before they change on 6th April 2019.
We’ve composed a quick year-end tax planning 2018/19 guide to help you.
Firstly list your earnings in the 2018/19 tax year.
Remember to include:
- Property rental income
- Pension income
- Self employed earnings
- Capital gains
- Interest received
- Foreign earnings
- Savings income
Next, work through the tax bands below to see where your income level sits:
£34,501 – £150,000
Dividend ordinary rate
Dividend upper rate
Dividend additional rate
(Most people’s Personal Allowance in 2018/19 is £11,850)
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
£11,850 Personal Allowance
This is the amount most people can earn tax free, between 6th April 2018 and 5th April 2019.
For most limited company directors this tax free allowance will have been used up by your monthly salary payments. If not then consider paying yourself an end of year bonus.
Remember however that this may trigger a National Insurance bill. Email email@example.com if you’re unsure of your salary payments so far this year and Tom will be happy to give you a quick update.
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
The first £2,000 of dividends taken from your company are tax free. Over this you’ll need to pay Dividend Tax, as outlined above.
Remember that dividends are the distribution of profits from your limited company – after Corporation Tax. So your company needs to be making a profit or have retained earnings for dividends to be declared.
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 2018/19 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 £125,000 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 2019/20 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. Alternativley you could qualify for Entrepreneurs Relief and withdraw the retained profits in the future, when the business is closed, thus only paying tax at 10% on the funds.
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!
Give to charity
If you make a charitable donation under the Gift Aid scheme, the charity can claim back 20% basic rate tax on any donations.
Using Gift Aid can also generate a refund for higher rate and additional rate taxpayers. Higher rate taxpayers can claim back the tax difference between the higher rate and basic rate on the donation.
A cash gift of £80, made under the Gift Aid scheme, will generate a refund of £20 for the charity, which receives £100. The donor claims back tax of £20, making the net cost of the gift only £60.
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 2018/19 self assessment tax return. This needs to be filed with HMRC, with your tax paid, by 31st January 2020.
For more information on self assessment tax returns visit the HMRC guidelines at https://www.gov.uk/self-assessment-tax-returns.