The tax year 2017/18 ends on 5th April 2018. As the tax year end approaches, it is a good time to take stock and review your financial position and make sure you have made the best use of 2017/18 rates and allowances. We have summarized tax saving tips for Directors of family and personal companies. For more detailed information, it is recommended to speak to your Accountant.
Personal Allowances
For 2017/18 your personal allowance is £11,500 which is reduced for income between £100,000 and £123,000 by £1 for every £2 and is further reduced to nil for income over £123,000.
Assuming You are entitled to a personal allowance, it is sensible to make use of it by extracting income up to that level This may be in the form of dividends salary or benefits-in-kind. What Is important is that it is not wasted as it cannot be carried forward.
If you cannot use all your personal allowance and are married or in a civil partnership, you can transfer 10% of your personal allowance to your spouse or civil partner if they are not a higher or additional rate taxpayer. This will save a couple £230
Dividends
It is usually tax-efficient to take a small salary and to extract further profits as dividends. All individuals are entitled to a dividend allowance in addition to their personal allowance This is set at £5,000 for 2017/18.
As the tax year end approaches, review the dividends that have been paid in the year and the level of retained profits. Consider the position of all taxpayers and, if retained profits are sufficient, pay dividends to use up the dividend allowance and any unused personal allowance of the shareholders. Consider also an "alphabet" share structure to provide the flexibility to declare different dividends for different classes of shares, and to tailor the dividend policy to the circumstances of each family member.
Timing of dividends is particularly important this year, as the dividend allowance falls to £2,000 from 6th April 2018.
Loan Account
It is important that the director's loan account is reviewed before the end of the tax year as well as before the company year-end. Where the account is overdrawn, consideration should be given to how this will be cleared: and where this is to be done by means of a dividend or bonus, which tax year it is beneficial for it to fall into.
It should be remembered that where a loan to a director has not been repaid within nine months of the company's year-end and the company is a close company, a tax charge equal to 32.5% of the outstanding balance must be paid to HMRC. The director will also suffer a benefit-in-kind charge if the loan balance exceeds £10,000 at any point in the tax year- even if only for one day.
Preserve the state pension
For those reaching state pension age on or after 6th April 2016, 35 qualifying years are needed to qualify for the full single-tier state pension. Where a director does not already have 35 qualifying years, consideration should be given to paying sufficient salary (or a bonus) to make the year a qualifying year.
Salary
A tax-efficient profit extraction salary usually combines paying a salary up to the level of the primary NICs threshold (£8,164 for 2017/18) where the employment allowance is not available and up to the level of the personal allowance (£11,500 for 2017/18) where it is. Beyond this point, it is usually more efficient to extract profits as dividends.
Review the salary paid for 2017/18, and where it is less than the optimal amount, make it up to this level in March 18. As noted above, paying sufficient salary (or a bonus to top it up) will ensure that the year is a qualifying year for National Insurance purposes.
Pension contributions
It is possible to make tax-relieved pension contributions up to the level of the available annual allowance. Aside from the valuable tax relief, making pension contributions can be a useful way to reduce income to preserve the personal allowance or to prevent the high-income child benefit charge from biting. The company can also make pension contributions if the annual allowance is unused
Therefore, review pension contributions and decide if it would be beneficial to make further contributions before the end of the tax year.
Family members
Don't forget family members. In a family company scenario, consider whether other family members have personal or dividend allowances that can be utilized, and whether they have used up their basic rate band. It generally makes sense to equalize income where possible to ensure that tax is not paid at the higher and additional rates until necessary
Likewise consider making pension contributions for family members
Final Point: Don't leave it too late - the year-end deadline is approaching. Remember that 2017/18 personal and dividend allowances not used by 5th April 2018 will be lost.
