Jack Bennett Tax Consultant

What should you do to ensure you are prepared for the tax year-end?

With just 41 days till Year-End, following on from our latest webinar, Tax Consultant, Jack Bennett, discusses two main points you should consider in making certain that your tax affairs are in order prior to the year-end. 

What should I do?

Maximising Tax Allowances

One way of making sure your tax exposure is minimised is by using your available tax allowances. If you don’t take advantage of them prior to the year-end, then they are lost – it is not possible to carry over many tax allowances from one year to the next.

If you are a shareholder or director of a company, look to take advantage of your 0% tax allowances.

Every person has a personal tax allowance of £12,570 along with a dividend allowance of £2,000 which are taxable at 0%, add to that the basic rate band of £35,700, then the total income becomes £50,270.

Due to lower dividend tax rates, in this example, a shareholder can receive just over £50,000 and only pay around £2,700 personal tax. Even if you don’t require funds in that year, it’s still advisable to declare the dividend for the full amount. This is because this will build up the loan account meaning a shareholder can draw down tax-free in the future. 

These low tax rates are also available to other family members, but make sure you take appropriate advice in order to make sure the whole family is benefitting from their tax allowances.

Interest Allowances

Another area that should be looked at, is interest received on loans. A company can pay interest on loans provided by shareholders or directors so long as there is a formal loan agreement in place which charges a fair market rate of interest. 

The interest is then tax-deductible for the company and goes against the corporation tax profits and it can be tax-free in the hands of the shareholder, by looking at:

Personal savings allowance – this is a tax-free allowance for interest income that attracts a 0% tax rate. If you are a basic rate taxpayer (up to £50,270), your personal savings allowance is £1000. For higher rate taxpayers that reduces to £500. There is no personal savings allowance for additional rate taxpayers. 

Starting rate for savings – this gives tax-free interest income up to £5000, as long as other income is less than £17,570. The key to this is that this other income does not include dividend income. So, in a typical scenario, a director may be taking a small salary that is significantly lower than the £17,570 threshold for other income. 

Once these two allowances are combined, directors could have a savings income of up to £6,000 with a 0% rate of tax for them and tax-deductible for their company – a win win!  

So, if you are a director and you haven’t already set up loan agreements, consider putting these in place so that you can charge interest on your directors’ loan account. Interest is usually then declared on an annual or quarterly basis and will be included in your income for that year.    

As always you should take advice from your tax advisers when considering any changes to your tax affairs.

For more information on how we could help you and your business, contact us at info@oldfieldadvisory.com or call 02476673160.

Please note: This article is provided for information only and was correct as at time of writing (23/02/22). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.