It is essential that you plan in advance before the year end. So tax reliefs are used efficiently, at the right times.
Here is what you need to know:
Director Shareholders – Salary
The personal allowance for 2018/19 is £11,850. If you are the only employee of your company, then as a Director you should look to restrict your salary to the secondary NI threshold of £8,424 as the employment allowance won’t be available to you.
You can also consider appointing your spouse or civil partner as a director before the year end and pay them up to the personal allowance as a salary. However, this will only be effective if they have little or no income of their own.
To avoid having HMRC reclassify the dividend as a salary payment and looking to charge the NI, you should consider preparing an up to date set of management accounts in order to ensure any proposed dividends aren’t likely to exceed the available profits.
If you are not an owner manager, there are still opportunities to make the most of the income tax allowances and the basic or higher rate band by triggering additional income ahead of 5 April 2019.
For example, if you are an unincorporated landlord, additional income could be realised if your tenants could be persuaded to make an advance payment of rent in exchange for a discount in the overall amount payable.
This is likely to be more realistic if your tenants are commercial rather than residential and will only work if you are entitled to use the cash basis.
If you have a director’s loan account with a substantial credit and you are not charging interest, you are missing out on a tax efficient means of extracting profit. Therefore, consider putting a charge for the 2018/19 tax year. The interest is not earnings so it is exempt from NI and will be deductible for Corporation Tax purposes as long as it does not exceed the commercial rate.
As an individual you may be entitled to make a tax relieved pension contribution of up to £40,000 per tax year. If you have any unused allowance this can be carried forward for the next three years.
Additional pension contributions are especially valuable if you are within the higher rate and additional rate tax band where your personal allowance is reduced. The effective relief on contributions within that band is 60%.
The qualifying period for entrepreneur’s relief doubles to two years from 6 April 2019. Make sure your contracts for sale are exchanged before the year end. If you are selling your business, you do not want to lose out due to this change.
In conclusion, owner managers should consider the possibility of charging their companies interest; investors could potentially trigger income gains to fully utilise their income tax allowances; and when it comes to pension contributions, review the prior three years’ to see if any unused allowances are available.