Check the amount of dividends you’ve paid yourself so far this tax year
Are you about to breach any tax thresholds? If so, it might be worth delaying your March dividends until after 5 April. Here are the thresholds you may want to keep an eye on. All calculations are based on the assumption that you receive a salary from the business of £8,164 (the most tax efficient amount) and don’t receive any other income other than this and the dividends from your business.
Payment on account threshold
- Maximum dividends: £21,666
- Tax bill: £999.75, payable by 31 January 2019
The basic rate band threshold – dividend income taxed only at 7.5%
- Maximum dividends: £36,836
- Tax bill: £2,137.50, plus payments on account for the following year – two lots of £1,068.75.
- Tax payable by 31 January 2019: £3,206.25. This will be reduced by any payments on account made towards the current year tax bill
- Second payment on account due 31 July 2019: £1,068.75
Child Benefit threshold
- Total income: £50,000 (£41,836 of which is dividends)
- Tax bill: £3,762.50 plus payments on account for the following year – two lots of £1,881.25
- Tax payable by 31 January 2019: £5,643.75. This will be reduced by any payments on account made towards the current year tax bill
- Second payment on account due 31 July 2019: £1,881.25
Personal allowance threshold
- Total income: £100,000 (£91,836 of which is dividends)
- Tax bill: £20,012.50, plus payments on account for the following year – two lots of £10,006.25
- Tax payable by 31 January 2019: £30,018.75. This will be reduced by any payments on account made towards the current year tax bill
- Second payment on account due 31 July 2019: £10,006.25
Got spare cash in the business? Make a pension contribution to save tax
Contributing to your pension is a good way to save for retirement and to save on corporation tax if you contribute from your company’s profit.
If your business makes £100,000 profit, the tax on this would be £19,000. However, if you were to contribute £25,000 from your company’s profit into your pension, you will reduce your profit to £75,000 and the tax payable would be £14,250. This will save you £4,750 in corporation tax and boost your pension pot by £25,000 at the same time.
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Thinking of selling an asset? Use your Capital Gains Tax (CGT) allowance
Everyone has a CGT allowance of £11,300 allowing you to make a certain amount of gain each year before you have to pay tax. It can’t be carried forward, so use it each year to reduce your risk of incurring a significant tax bill in later years. Any gains more than the allowance are taxed at 10% or 20% for higher rate taxpayers. Gains on residential properties are taxed at 18% or 28%.
You can make the most of your spouse’s or civil partner’s allowance too. Transfers between couples are not treated as sales, so they are not subject to CGT. If you or your spouse have not used all of your allowance in the tax year, you may want to consider transferring investments to him/her.
Use your ISA allowance – and those of your partner and children
Utilising your full ISA allowance is one of the easiest ways to ensure you’re not paying more tax than you need to. ISAs are efficient tax wrappers for savings and investments. There is an annual allowance of £20,000 that you can save or invest into an ISA and you can choose how to invest this between stocks and shares, property or cash. To use your allowance for this year, make sure you make an investment on or before 5 April 2018.
You don’t have to pay tax on any profits made in an ISA. This includes capital gains, income and inheritance tax. You can even pass on your ISA to a spouse after death, which they will inherit tax-free.
Dividend income that’s received inside of an ISA is received tax free and doesn’t use any of your dividend allowance. In comparison, outside an ISA, dividends are taxed at 7.5%, 32.5% or 38.2%.
If you have children, junior ISAs are a great way to save tax, with a limit for the 2017/18 tax year of £4,128.
Got spare cash personally? Consider Enterprise Investment Schemes (EIS)
The EIS and Seed EIS schemes make investing in smaller businesses a great way to save tax. The EIS scheme helps smaller, higher-risk trading companies raise finance. This is done by offering a range of tax reliefs to investors who purchase new shares in those companies.
For those looking to reduce their personal tax bill, when you invest in EIS shares you can claim 30% income tax relief. By investing £10,000, you will have £3,000 taken off your personal tax bill, meaning the investment will only cost you £7,000.
The SEIS scheme is specifically designed to help start-up businesses and carries an even bigger tax relief. You can claim 50% income tax relief, meaning an investment of £10,000 will reduce your tax bill by £5,000.
The details above are just the headlines. The rules surrounding EIS & SEIS investments are complex and there are risks involved, so it is really important that you seek advice before you do anything.