This article explains how to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2017/18, and will also explain how to make the most of the tax planning opportunities you have available.
The current 2017/18 tax year started on 06 April 2017, and will finish on 05 April 2018.
Most of our clients receive personal income from their business in the form of salary and dividends. Any personal tax payable on the salary is deducted by your ltd company through the usual payroll channel, but dividends are not taxed at source like this.
How much will my Personal Tax bill be?
So long as your My Earning page is kept up to date, you can easily see your estimated personal tax bill for 2017/18 by reading the Dividend summary section of your My Earnings page.
To make sure you are using your My Earnings page correctly, read our guidance below.
The 2017/18 tax year was the second year under the new dividend tax rules, as a quick recap: From April 2016 a new £5,000 tax-free dividend allowance for all taxpayers, accompanied by increased tax rates on dividend income, was introduced. You’ll pay tax on any dividends you receive over £5,000 at the following rates:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
The £5,000 tax-free dividend allowance is available to anyone who has a dividend income.Work out what your total earnings are to date
If you have received dividends from your company for the current tax year, you need to consider your overall personal earnings from ALL sources, to determine if you face a personal tax charge on those dividends, and which tax band the dividends will fall into. Other earnings sources can include salary from other employers for 2017/18, rental income, foreign income, or bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £11,500, then you will face a personal tax charge on any dividends you received from your limited company above the £5,000 allowance.
We have developed a simple but effective way of tracking your personal earnings position. What you need to do is;
Paying yourself too little
- 1. Go to your My Earnings page, and complete/update Personal income from other sources for 2017/18 with any personal earnings you received OTHER THAN from your own limited company;
- 2. Also ensure the My Earnings page is up to date with all payments you have made to yourself for the tax year (if you are a Service 1 client, and your bank statements are sent to our office, we will have this up to date for you up to your most recent statement we hold – you may still need to add in any recent payments you have made to yourself);
- 3. The top of the My Earnings page will then calculate an assessment of your personal tax position, and calculate what personal tax charge you face on the dividends you received;
Make sure you have utilised your £5,000 allowance for the current tax year. You will also need to do a little forward planning here. If you have NOT used up your basic rate band in the current year, and you are expecting to require more income in the next tax year (maybe you are planning a house extension or a long holiday), rather pay more dividends in the current tax year, at the 7.5% rate, than push over into the 32.5% band next year.Paying yourself too much
If you have earned over the basic rate band, and want to limit the dividend tax charge you face, you can;
- Stop paying yourself altogether from your ltd company until 06 April 2018;
- If you can’t live without some personal cash flow, then consider loaning yourself money from your ltd company, and then after 06 April 2018 repay the loan back to the company;
- If you can’t live without some personal cash flow, then you could also consider drawing some hard earned goodwill from family / friends until 06 April 2018;
There is a caveat here though. If you have surplus Retained Earnings, but you don’t think you will need these funds in subsequent tax years, leave them in the business until you close down your company. There are still attractive tax reliefs available for extracting funds from your business when closing down.Retained profits
This is very important – don’t skim-read this section. The above two sections talk about being paid dividends from your company. You can ONLY do this if your company has sufficient retained profits to pay out a dividend. Your retained profits is not simply the money left in your company bank account – some of that will be needed to pay your company tax bills.
Dividends can only be paid out of after-tax profits. Your company retained profit is your company bank balance less any tax liabilities it faces to date,such as Corporation Tax, VAT, and PAYE/NI. Provided all your bookkeeping entries are up to date, the Profit & Loss Summary on your Dashboard page calculates how much retained profits you have (called ‘Retained earnings’). Use this to determine if you can make further dividend payments for the tax year. For our Service 1 clients if you are at all unsure about your level of retained earnings then please call/email us. For our Service 1 clients, the company retained earnings is only calculated once a year (at the company year end) which makes this form of tax planning very difficult. If you think better tax planning would be useful, we recommend you switch up to Service 1.Actual payment of dividends
If you are wanting to plan your dividend payments to ensure you get as close as possible to the basic rate limit, then for simplicity we suggest you ensure the dividends are paid on or before 05 April 2018.Planning ahead for 2018/19
By now you should have your head around the new figures, and dividend taxes. Three important points to remember with this:
- You will most likely have a tax bill for the 2017/18 tax year. If this tax bill is more than £1,000 (due to tax on dividends) you will be required to make payments on account for the 2018/19 tax year. The payment on account is equal to the tax owing for the 2017/18 tax year, and split into two payments. One due on 31 Jan 2019 and the other on 31 Jul 2019. Remember, you are paying your tax in advance with this. So once your 2017/18 return is submitted, you will only be paying any additional tax due, plus the following tax years payments on account.
- If you have a loan taken after 06 Apr 2016 which is not repaid within 9 months of your year end date,the temporary S455 tax that you are going to need to pay will be at 32.5% and not 25%.
- The current dividend allowance of £5,000 for 2017/18 reduces to £2,000 for the 2018/19 tax year.
The higher earnings threshold for the 2018/19 tax year is £46,350. We are advising a monthly salary at £702 (You will be prompted to do this when you log in to your new account after 5 April 2018). At this rate you will avoid paying both PAYE and NI. The dividends that you will then be able to take for the year, paying no personal tax, will be £5,426. All dividends over this will incur tax at the relevant rates.