Structuring your income tax efficiently for 2018/19

Date: 6th April 2018

As a director shareholder of a company you have more opportunities than most to organise your income tax affairs efficiently. With that in mind, and as a new tax year starts on 6 April, how should you approach it?

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2018/19 – the usual advice

As a company director shareholder you may be bored of reading the same old tax planning advice year after year, but that doesn’t mean it’s not valid. What’s more, there’s bound to be changes to rate bands or your financial circumstances which means there’s always room to improve tax-efficiency, but how should you go about it?

Where do I begin?

The starting point is not “how much income should I take from my company”. That’s the variable factor you can use to achieve tax efficiency. Start instead by estimating income that isn’t under your control for 2018/19, for example, interest and dividends from investments, profits on rental property etc. Once you know this you’re in a better position to decide the amount and type of income to take from your company

Example. Peter is the only director and shareholder of Oaktree Ltd. It makes more profit each year than Peter needs to take as income. He estimates his other income for 2018/19 to be: £5,000 taxable profit from a buy-to-let, £300 bank interest and £800 of dividends from various companies. He can now plan his company income for 2018/19.

 

Personal allowance. For 2018/19 the tax-free personal allowance is £11,850. Peter should use this in full, take a salary of at least £6,550 (£11,850 – (£5,000 + 300)) to use this (but see Tip 2).

 

Tip 1. Unless you have earned income from somewhere other than your company, taking a salary of more than £6,032 in 2018/19 ensures that you’re entitled to a full year’s NI credits which count toward your state pension.

Tip 2. While £6,550 is enough for Peter’s needs for state pension credit, it’s more tax efficient for him to take a salary of £8,424, i.e. the maximum that can be taken without NI being payable.

 

Dividend allowance. Next, Peter should use all his £2,000 dividend nil-rate allowance. His dividends from investments are £800, he should therefore take at least £1,200 dividends from Oaktree. So far Peter’s income from Oaktree is a very tax efficient £9,624 ( £8,424 + £1,200), but even with his other income that won’t meet his needs.

More dividends. The way for Peter to go is more dividends rather than salary. These are the most tax efficient if, when added to his other income, they remain within the basic rate band of tax. For 2018/19 he can take dividends to bring his income up to £46,350. The tax rate on dividends to this point is just 7.5%. If Peter needs more income, dividends remain the most tax-efficient option.

 

Fine tuning. Tax reliefs increase the amount of income you can receive tax free or how much of it is payable at basic rate tax (instead of higher rate)

Tip. If your finances allow, take only as much income as you need to keep within the basic rate band, then in the final days of 2018/19 (when you’ll know better how much your other income and tax reliefs are), take a dividend that will use any remaining basic rate band.

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