Tax planning for year end – when you’re a director or shareholder

If you can put income tax-savings plans in place before 6 April, the benefits will carry you through the next tax year.

Essentially, you should be aiming to use up your personal allowance (for 2020/21, that’s £12,500) and minimise any additional/top-rate tax. Income over £150,000 is currently taxed at 45%; personal allowance is withdrawn when income (less deductions) exceeds £100,000.

Reorganise, to avoid going over the limit

It could be that – for obvious reasons – your income took a hit last year, but expectations are that things will broadly return to “normal” going forward. So, reorganising your affairs now could be a sensible decision. 

An example:

If total personal income is less than £150,000 this year (or, £100,000), but should be above that next year, you could “bring forward” some of your income into 2020/21, to avoid paying additional or top rate tax, or losing your personal allowances. Another thing you could do, if your personal income is likely be less than £150,000 in 2021/22 (or, £100,000) is delay a bonus, or some dividends, until after 6 April 2021. 

A different strategy is to pay an otherwise non-earning partner a salary, to get some tax relief. If the salary is between £520 and £792 a month, your partner will avoid employee NICs (a small amount will be payable if the salary exceeds £732 a month), but still receive any state benefits. Or pay an employer’s contribution into your partner’s personal pension – it should be classed as an allowable business expense, so no taxes/NICs are required on the payment. One word of warning: the value of your partner’s salary/benefits/pension contribution must justify the work performed.

Dividends

If you are the owner of a limited company, consider paying a dividend before 6 April, especially if you have not fully used the £2,000 tax-free allowance. Bringing a dividend payment forward in this way could help if your income falls into the basic rate band, or you will be paying tax at the higher rate this year but expect to be an additional/top rate payer next year.

Alternatively, make a genuine transfer of shares to your spouse or civil partner before you pay a dividend – leave plenty of time between the gift and the dividend payment, though.

Other tips that might work for you

  • Speak to a pension’s advisor about whether employer-funded pension contributions could be a good decision.
  • Review company cars – there are tax-saving incentives to switching to a fully electric or ultra-low-emission hybrid. There is a great deal of information online about this.
  • If you were required to work from home during the pandemic, there is a tax-free amount of £312 for 2020/21 to cover additional costs (regardless of how many weeks you worked from home.) Look at the government’s website for more.
  • If you’re going to be working abroad, it might make sense to leave before 6 April – again, get advice specific to your situation.
  • Changes to off-payroll working, known as IR35, might affect your company from 2021/22 onwards. If you’re not sure, check with your accountant.

Self-employed, but don’t work as a limited company?

The same approach applies to income levels as it does to director/employee tax planning. If you received any Covid-19 support payments, these will be taxable, so they must be included when you are calculating your trading profits for 2020/21.

The experienced, knowledgeable team at Figurit will help you plan for the end of the financial year and stay within the rules. Give us a call and we can help you to explore solutions to save on income tax, relevant to your specific circumstances.

Call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.