With the end of the tax year approaching, now is the perfect time to ensure that you minimise the amount of personal tax you need to pay, while maximising your take home pay. This article explains how you can do this, to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2018/19, and will also explain how to make the most of the tax planning opportunities that you have available.
The current 2018/19 tax year started on 06 April 2018, and will finish on 05 April 2019.
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, and you will need to pay the tax due on your dividends through your self-assessment tax return.
From April 2018 the lower £2,000 tax-free dividend allowance applies for all individuals. You will pay tax on any dividends you receive over £2,000 at the following rates:
- 7.5% on dividend income within the basic rate band (up to £46,350)
- 32.5% on dividend income within the higher rate band (£46,351 to £150,000)
- 38.1% on dividend income within the additional rate band (over £150,000)
The allowance is available to anyone who has dividend income.What you need to do now(1) 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 2018/19, rental income, foreign income, or bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £11,850, then you will face a personal tax charge on any dividends you received from your limited company above the £2,000 allowance.
We have developed a simple but effective way of tracking your personal earnings position.What you need to do is;
- Click How am I Doing? > My Earnings; and update section 2 - 'Personal income from other sources for 2018/19' with any personal earnings that you received OTHER THAN from your own limited company;
- b. Also ensure that section 6 'View payment summaries' is completely up to date with all payments that 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 that you have made to yourself);
- c. The Dividend tax summary in Section 1 'Summary of your 2018/19 personal earnings' will then calculate an assessment of your personal tax position, and calculate what personal tax charge you face on the dividends you received;
IMPORTANT: Please note, this calculation does not account for any payments on account that you have already made for the 2018/19 tax year, nor does it allow for any payments on account that will be due for the 2019/20 tax year.(2) Retained profits
This is very important – don’t skim-read this section. You can ONLY pay dividends from your company IF your company has sufficient retained profits to pay out a dividend.
Your retained profits is not simply the money 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.
- Dividends that are paid where there isn’t sufficient distributable profit are unlawful according to the Companies Act 2006 and will have to be repaid.
Provided all your bookkeeping entries are up to date, the Profit & Loss Summary on your Dashboard 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.(3) 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 that you ensure the dividends are paid on or before 05 April 2019.(4) Paying yourself too little
. Make sure you have utilised your £2,000 dividend 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.(5) 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;
(6) Planning ahead for 2019/20
- Stop paying yourself altogether from your company until 06 April 2019;
- If you can’t live without some personal cash flow, then consider loaning yourself money from your ltd company, and then after 06 April 2019 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 2019;
. By now you should have your head around the new figures, and dividend taxes. Two important points to remember with this;
- You will most likely have a tax bill for the 2018/19 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 2019/20 tax year. The payment on account is equal to the tax owing for the 2018/19 tax year, split into two payments. One due on 31-Jan-2020 and the other on 31-Jul-2020. If this is your first year of completing a self-assessment, this is going to be a massive cash flow knock, at first, but remember, you are paying your tax in advance with this. So once your 19/20 return is submitted, you will only be paying any additional tax due, plus the following tax years payments on account.
- If you have a director’s loan, 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%
- The tax-free allowance will rise from £11,850 to £12,500.
- The basic rate band will rise from £34,500 to £37,500.
- This makes the higher earnings threshold for the 2019/20 tax year £50,000.
- The tax-free dividend allowance remains at £2,000.
- We are advising a monthly salary at £719 (You will be prompted to do this when you log in to your account after 5 April 2019). 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 £5,872 (This figure is based on you having no other earnings from other sources). All dividends over this will incur tax at the relevant rates.
The maximum tax saving for 2019/20 compared with 2018/19 is £860. As a director shareholder this is achieved by taking a salary no greater than the NI threshold of £8,632 plus dividends sufficient to use your basic rate band in full.(7) Extra bits to consider now
Trivial benefits in kind – There is the possibility of getting an additional £300 out of your business using the trivial benefits –there are qualifying conditions to be met, so please get in touch to make sure you know how to do this correctly.
You can (and should) split income producing assets with a spouse or partner to reduce or share the tax bill.
Use Gift Aid donations to increase your basic rate limit. Donations can be paid from your limited company, or personally, but the tax treatment will be different.
Savings - You may also get up to £5,000 of interest tax-free. This is your starting rate for savings. You are only eligible for the starting rate for savings if your other income is less than £16,850.
There is also a 0% personal savings allowance of £1,000 for basic rate payers and £500 for higher rate payers.
There are two more tax-free £1,000 allowances – one for selling goods or providing services (like Etsy), and one for income from property you own (such as letting through Air BnB).
CGT rates are 10% for basic rate taxpayers and 20% for higher rate taxpayers. This excludes residential property gains.
Make pension contributions directly from your company to your pension pot – this is a great way to get funds out of the company, as the contributions will be a tax deductible expense. Always ensure that funds clear bank accounts by 05 April 2019. And bear in mind that funds moved to your pension are tied up until retirement.
There are also the following Pension changes from 2018/19
- The lifetime allowance is increased to £1,030,000
- You will be able to contribute a maximum of £40,000 to your pension for the tax year. This annual allowance will reduce by £1 for every £2 that an individual's income exceeds £150,000, down to a minimum of £10,000 for individuals with income of £210,000 or more. Get in touch if you would like further guidance.
Tip: When looking at pensions it’s important to both, develop strategies for future pension contributions and also understand any current pensions you may have accrued in case it makes sense to consolidate these.
Child Benefit claimants and their partners need to consider the £50,000 band because the High Income Child Benefit Tax Charge (HICBC) applies. If you earn more than £50,000 and your partner receives Child Benefit payments it is likely that you will have to pay this back, through your self-assessment. At first consideration you may think that it is easier to make an election to no longer receive Child Benefit. But this needs some additional consideration as it will affect your partners entitlement to the state pension. In order to qualify for a full state pension, you need to have 35 years of national insurance contributions, claiming these benefits may get your national insurance credits. See https://www.gov.uk/national-insurance-credits
Remember – If your income exceeds £100,000; £1 of the personal allowance is clawed back for every £2 of income over the £100,000 mark, until your personal allowance is reduced to £0. ISA's
An ISA (Individual Savings Account) is a tax-efficient way to save or invest.
Sheltering capital gains and income tax relief
- Have you used up your ISA limits for the year?
- Have you considered funding an ISA for children or grandchildren?
- Have you considered a Junior ISA for children under 18 without a trust fund?
- Have you started a Right to Buy ISA for the children?
- Have you consider a Lifetime ISA?
- Investment in an Enterprise Investment Scheme (EIS) company provides income tax relief at 30%. Gains can be deferred if reinvested in an EIS from one year before to three years after they arise.
- Investment in a Social Enterprise provides income tax relief at 30%. Gains can be deferred if reinvested in an EIS from one year before to three years after they arise. Social Investment Tax Relief (SITR) is available for investment in debt as well as shares.
- Investment in a Seed Enterprise Investment Scheme (SEIS) company can be up to £100,000 per year, and provides income tax relief at 50%. Capital gains made in the same year as the SEIS investment can be deferred.
- Deferred gains made on or after 3 December 2014 retain eligibility for Entrepreneurs' relief when invested in EIS, SITR and SEIS.
- Investment in a Venture Capital Trust (VCT) provides income tax relief of 30% on investments up to £200,000. VCT dividends are tax free and the investment can be cashed in tax free after 5 years. Capital gains tax deferral is not available for VCT investments.
- Not UK resident? Don't forget the timing of capital gains: gains accruing on the disposal of UK residential property are from 5 April 2015 subject to CGT.