With the end of the tax year approaching, now is the time to consider your profit extraction plans from your Limited company. Careful planning can maximise your income whilst minimising your in year tax liability.
In 2018/19, the dividend allowance is falling from £5,000 to just £2,000. Above the allowance the dividend tax rates bite hard at 7.5%, 32.5% and 38.1%, depending on whether the dividends fall into the basic, higher or additional rates respectively.
Make sure that you take full advantage of your dividend allowance and especially the higher £5,000 allowance in 17/18 if profits allow.
Bear in mind with dividends….
Interim dividends must be declared at a board meeting, and before declaration a review of the company’s finances must be carried out to establish that the dividend can be met out of profits. If not, the dividend may not be considered legal and may be recovered from the directors should the company fall on hard times or fail to pay its tax liabilities.
If good management accounts are being kept, which is now easier and easier with cloud based software working in conjunction with your accountant, then there is no real reason that accurate estimates can’t be made, particularly towards the end of the year.
Make sure to keep a paper trail evidencing that the dividend was authorised and agreed in advance of the year end. HMRC consider a dividend is paid when the director can use it, so make sure any dividends credited to your Directors loan account are transferred at the time and not when it comes round to doing the accounts. Otherwise, HMRC may challenge that this was employment income and seek to tax it as such.
Now is a good time to plan how you will be paid by your limited company in 18/19. Consider optimum salary, rental income from assets used by the company, interest on loan accounts and dividend plans, all of which can provide excellent tax planning opportunities on their own, or when combined.
Additionally, make full use of benefits in kind, trivial benefits (capped at £50 each, and up to £300 in the year) and pension exemptions. If you haven’t done so already, now is the time to take advantage of these opportunities.
Timing is everything…
If drawing profits from the company pushes you into higher rate personal tax band, consider leaving profits in the company where they will only be taxed at 19%. This can be a great tool to carry profits between tax years, and is particularly useful if profits are variable year on year, or maybe you are coming up to retirement and will fall into basic rate tax band in future years.
Gift aid and pension payments can also help keep you in a lower tax band.
All of the above should not be undertaken without competent professional advice.
If you wish to discuss any of the above, then please don’t hesitate to contact Jane or Jamie at Townend English on 01759 305 989.
James Foxton FCA 16th March 2018