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Pre April 5th Tax Advice
Tax considerations surrounding directors/shareholders - salaries
Review what salary you have taken to date -the personal allowance for 2018/19 is £11,850. If your company is able to claim the employment allowance for secondary Class 1 NI, consider taking further salary up to the personal allowance level.
If you are the sole employee of your company then the employment allowance cannot be claimed
So if you are the sole employee, it is worth considering appointing your spouse as a director before year end, and paying them a salary up to the personal allowance. This will only be beneficial if they held little to no income from other sources.
Assuming you have taken salary or have other income utilising your personal allowance, in order to extract more profit from your company you should look to vote dividends, asthe applicable income tax rates are lower than they would be if a bonus were paid instead. Dividends are not deductible for corporation tax purposes, but they are also not subject to NIC. Note you company must haveaccumulated profits to pay them from.Make sure your company has sufficient reserves to pay any proposed dividends – arrange for your accountant to prepare management accounts to justify the dividends you wish to declare. Hold a board meeting to declare interim dividends and to have a review of the accounts.
Other income
If you are able to trigger additional income ahead of 4th April 2019, there may be other opportunities to make the most of the income and capital gains tax allowances. If you have assets that trigger capital gains, you can achieve this by disposing of them.
Always ensure that although you may have these assets in your investment portfolio – always have them checked by your financial advisor prior to any transactions taking place.
If you are of pensionable age, you are able to top up your income by using flexible access to withdraw pension income – although this is not recommended if further contributions in excess of £4000 per year and are intended to be made.
Savings income
Interest is out of control for most, but the timing of payments can be controlled by owner managers who have lent money to their own companies. This could be in the case that you have a director’s loan account with a substantial credit, not necessarily a formal loan. If you’re not charging interest you are missing out on a tax efficient means of extracting profit, so look to apply an interest charge for the 2018/19 year. As the interest is not earnings, it is exempt from NI and if it doesn’t exceed a commercial rate it will also be deductible for CT purposes.
You are likely to find that you can justify a significantly higher rate of return than on a regular deposit account because a small company would be viewed as much more risky by a third party lender. Making it worthwhile to encash existing investments to make a loan to your company.
Tax Timing
The interest is taxed in the tax year of receipt to the individual’s perspective. This means it is possible for you to make a loan to the company ahead of 5 April 2019, and make a charge for interest for the next twelve months to include in the 2018/19 taxable income figures. In order to avoid exceeding a commercial rate of interest, it could be worth discounting the rate applied to the advance payment. One issue that you may find is that you will need to leave the amount in the company for the subsequent twelve months, or the interest would need to be repaid. If you are replacing existing long term investments this is more unlikely.
Pensions Savings
The tax-relieved contributions in each tax year allow individuals entitlement to make up to £40,000. It’s also worth mentioning that any unused allowance can be carried forward for an additional three tax years – so ensure that you review historic contributions if you are looking to make a large one off payment.
If you are a higher earner be aware, as the annual allowance may be further restricted to a limit of £10,000. Furthermore, be careful if you have previously used flexible access to withdraw pension benefits as this may restrict future tax relieved contributions.
Entrepreneur’s relief
The qualifying period for entrepreneurs’ relief doubles to two years overnight from 6th April 2019. Make sure that contracts for sale are all exchanged ahead of the end of the financial year where it is in your control.