Time for Year-End Tax Planning
As a director shareholder of your company you’re in a good position to arrange your income for maximum tax efficiency.
Now that the end of 2019/20 is in sight what can you do to achieve this?
Whatever arrangements you put in place to maximise tax efficiency for your income, February is a good time to review them before the end of the tax year. Start by checking that you’ve used your lower tax rate bands as far as feasibly possible.
Tax Rate Bands and Thresholds
Ideally, draw enough income from your company so that together, with that from other sources, the total is at least equal to the basic rate threshold.
For 2019/20 that’s £50,000 (£12,500 tax-free personal allowance plus the normal basic rate band of £37,500). It’s possible to increase your income further but be taxed at the basic rate using tax reliefs, such as for pension contributions.
Raising the Threshold
Tax reliefs don’t all work the same way. Essentially, there are two types, those which:
- are tax deductible and increase your basic rate threshold pound for pound; and
- those which only increase your basic rate band.
The first type includes tax allowances (apart from the personal allowance and blind person’s allowance) and tax-deductible costs.
E.g. business expenses for which you aren’t reimbursed, and interest on tax-allowable loans, such as those to fund working capital for your business. The second type includes tax allowances related to marriage, pension contributions and gift aid payments.
Example. In February 2020 Dan projects that his income for 2019/20 will be £56,000.
He’s entitled to tax relief for expenses of £2,000 which he incurred in his job and for which he has not claimed reimbursement from his company. His taxable income is therefore £54,000 which exceeds the basic rate threshold meaning he’ll pay higher rate taxes on £4,000 (£54,000 – £50,000)
If on or before 5 April 2020 Dan pays an extra pension contribution of £4,000 his basic rate threshold will increase by that amount and he won’t have to pay any higher rate tax.
This would save Dan tax of £800.
Tip 1. Between now and 5 April 2020 pay pension contributions. The effect will be to reduce your tax bill by up to 40p in the pound. The same applies for gift aid payments.
But if overall you don’t want to spend more on pensions or gift aid you can instead bring forward such payments you intend to make after 5 April.
Tip 2. If your income has already passed the basic rate tax band and you don’t want to make further pension or gift aid payments you can limit the higher rate tax damage by simply deferring any further salary or dividends until after 5 April 2020. Instead, if you need the income to survive, borrow it from your company and repay it when you take the deferred salary.
To increase the income you can take and be taxed on at the basic rate, make extra pension contributions or gift aid payments on or before 5 April 2020. Conversely, if you’ve already used your basic rate band avoid higher rate tax by deferring any further income from your company until after 5 April 2020.
Borrow the money from your company.
If you need help or advice please contact us [email protected]