“The hardest thing in the world to understand is the income tax”
Does this famous quote of Albert Einstein’s seem familiar to you? Many can struggle to understand how their individual tax is calculated, and how to keep their situation as tax-efficient as possible. For this reason, I have listed a few key suggestions, to ensure you take advantage of potential tax savings before 5th April 2019.
Dividend tax free allowance
Every shareholder has access to a tax-free dividend allowance of £2,000 per year, and if not taken, this cannot be carried forward into the following year. As this is additional to the Personal Allowance, each shareholder can receive £13,850 without paying any income tax.
Utilise the full basic rate tax band
It is important to make sure that the basic rate tax band is utilised in full, for both husband and wife, as this is an extremely tax efficient way of drawing money out of your company. With a basic dividend rate of 7.5%, a couple can earn a combined income of £92,700 and pay less than £5,000 tax. This presumes that both husband and wife are shareholders and have sufficient reserves in the company to pay dividends up to the basic rate band for each shareholder.
Personal pension contributions can be offset against income, in order to reduce any higher rate tax. Every individual has access to a pension contributions allowance of up to £40,000 per tax year. Once an individual has made contributions to a registered pension scheme, you can carry forward the annual pension allowance into future tax years, up to 4 years in total. For example, a couple who both have full carry forward allowances can make pension contributions of up to £320,000 which can then be offset against their taxable income. If the couple were paying higher rate tax, this could save around £128,000.
It is very important that you seek professional advice before making pension contributions, to ensure that this is dealt with correctly and in the most tax effective manner. Please feel free to contact one of our team if you would like to discuss this further and see how you could benefit from making pension contributions.
The analysis, comments and advice contained within this article apply our interpretation of current tax legislation, rates and allowances, all of which are subject to change from time to time.
Comments relating to pensions and possible investments should not be construed as advice or recommendations. This report seeks to provide illustrations only and is not a substitute for advice provided by regulated financial advisers.