If you want to make the best use of tax allowances, it’s important to plan carefully for the end of the tax year, even if April seems like some way away. Planning ahead of time allows for flexibility in how you choose to allocate or designate any income.
Additional pension contributions
One option is to make additional pension contributions, as contributions will get tax relief. There is an annual allowance of £40,000 and any funds must be allocated before the end of the tax year to qualify.
ISA allowances are available to all adults and allow up to £15,000 (2014/15) to be invested tax-free. Each year savers receive a new allowance; any unused allowance from the previous year cannot be carried forward.
Transferring personal tax allowance
Allocating income to family members can also result in tax savings. A spouse or partner will have their own personal allowance, which should be taken advantage of if they are a low earner and unlikely to use the whole allowance themselves. You do need to exercise some caution, however, as there are legal restrictions designed to stop people taking advantage of ‘income shifting’.
It’s also possible to transfer funds to children, who have their own allowance but it’s important to note that parental gifts will not qualify for a tax exemption.
Options for company owners, shareholders and directors
Company owners, shareholders and directors are in a special situation where tax planning is concerned, as they have the option of drawing salary, bonus or dividends from income. How you choose to do this will have different tax implications.
Dividends do not attract national insurance contributions (NICs), but are not generally tax deductible. Delaying payment of dividends until after the tax year has ended can result in tax savings, so please check with us for further advice.
Salaries and bonuses will attract employer and employee NIC contributions but are mostly tax deductible.
The situation can be complicated by the way an individual chooses to organise their business. Setting up a limited company means paying corporation tax at 20% or 21%, whereas sole traders who are required to pay up to 45% income tax.
If the owner of a limited company wishes to take profits from the company as a salary or dividend then both income tax and NICs will be payable, which can greatly increase the amount of tax payable overall.
Dividends can only be paid out of profits, so new businesses may not have this option. If retaining the right to claim benefits such as maternity leave are important, it makes sense to remain an employee of the business.
If you would like to discuss any of this further, please contact us for a free initial consultation on 020 7330 0000