With the tax year end fast approaching Jane Parry – managing partner and head of tax at PM+M– discusses how benefits, bonuses and dividends can be used by entrepreneurs to increase their tax efficiency.
Directors and employees
Income over £150,000 is taxed at 45% (or 38.1% for dividends). You might be able to minimize your exposure to this additional rate by delaying a bonus until 2019/20 if your income will fall below £150,000 in that year. If your income is less than £150,000 this year but is expected to exceed that figure next year, you could bring forward income into 2018/19 to minimise your exposure to the additional rate next year.
You can use a similar strategy to keep your income below the £100,000 level at which you would start to lose your personal allowance or £50,000 at which you start to lose your child benefit. Alternatively, you could sacrifice salary to bring your income below any of the thresholds in exchange for a tax-free employer pension contribution.
If your income is exceeding one of these key thresholds this year, think about whether a pension contribution would make sense before 6 April to take you back below that threshold. You should take advice before making such pension contributions or arranging employer contributions to ensure that you do not exceed your pension annual allowance. Gift aid donations to charity can also be a useful way to reduce income below key thresholds.
This is also a good time to review whether a company car is worth having given the recent substantial tax rises, especially for diesel cars. In 2020/21, the tax on ultra-low emission company cars will be reduced – significantly in the case of cars with a high electric motoring range. Switching to a company car with very low CO2 emissions, especially an electric or hybrid model, could save you and your company tax and NICs, as well as a reduction in running costs. Traditionally, diesel or petrol company cars have become less attractive in terms of company car tax and more efficient to run personally, however with an electric or hybrid car, it may be that running them as a company car is best.
If you are a shareholder as well as director, you should consider whether you are receiving the right mix of salary and dividends. Typically a low salary with most income taken as dividends is tax efficient, but not if you spend a lot of your time on R&D and your salary is included in the company’s R&D tax credits claim on which enhanced tax relief is available.
You should consider paying a dividend before 6 April 2019 if you operate your business as a limited company. This will be particularly beneficial if you have not already made full use of the £2,000 tax-free amount this year. Bringing forward a dividend could also be beneficial if the income will fall into the basic rate band this year, or if you expect to pay tax at the higher or additional rate next year but only at the higher rate this year.
You could even give shares to your spouse or civil partner shortly before paying a dividend, provided you genuinely transfer ownership. It is advisable to leave as much time as possible between the gift and the subsequent dividend payment. You should also be aware of the capital taxes impact of any such gifts. Transfers between spouses or civil partners are normally tax neutral, but you may inadvertently impact on your future eligibility for capital gains tax entrepreneurs’ relief or inheritance tax business property relief. Make sure to take advice before making such gifts.