With the end of the tax year approaching, now is the perfect time to ensure you minimise the amount of personal tax you need to pay. This article explains how you can do this, to avoid an unexpected tax bill when you come to complete your personal self-assessment tax return for 2010/11, and will also explain how to make the most of the tax planning opportunities you have available.
Just as a quick refresher, the current 2010/11 tax year started on 06 April 2010, and will finish on 05 April 2011.
Most of our clients receive personal income from their business in the form of salary and dividends. Any personal tax payable on the salary is deducted by your ltd company through the usual payroll channel, but dividends are not taxed at source like this. For the most part, if our clients do face a personal tax charge for 2010/11, it will most likely be due to dividend payments received – and this is where the tax planning opportunities lie.
(1) Paying yourself too much
If you have received dividends from your company for the current tax year, you need to consider your overall personal earnings from ALL sources, to determine if you face a personal tax charge on those dividends. Other earnings sources can include salary from other employers for 2010/11, and bank interest from your personal bank accounts. If your total gross earnings from ALL sources exceeds £43,875, then you will face a personal tax charge on any dividends you received from your limited company above the £43,875 threshold.
We have developed a simple but effective way of tracking your personal earnings position. What you need to do is;
(a) Go to your ‘My Expenses’ page within your No Worries online account, and ensure all your expenses are up to date;
(b) Go to your ‘My Earnings’ page, and complete/update Section 2 “Personal Income from other sources for 2010/11” with any personal earnings you received OTHER THAN from your own limited company;
(c) Also ensure Section 5 “Last 6 payments recorded as made to your personal account” is completely up to date with all payments you have made to yourself for the tax year (if you are a Club Gold client, and your bank statements are sent to our office, we will have this up to date for you up to your most recent statement we hold – you may still need to add in any recent payments you have made to yourself);
(d) Section 1 of your ‘My Earnings’ page will then calculate an assessment of your personal tax position, and if your total earnings from all sources exceeds £43,875, it will calculate what personal tax charge you face on the dividends you received;
If you have earned over the £43,875 threshold, and want to limit the dividend tax charge you face, you can;
– Stop paying yourself altogether from your ltd company until 06 April 2011;
- If you can’t live without some personal cashflow, then consider loaning yourself money from your ltd company, and then after 06 April 2011 repay the loan back to the company;
- If you can’t live without some personal cashflow, then you could also consider drawing some hard currency goodwill from family / friends until 06 April 2011;
(2) Paying yourself too little
Paying yourself too little can sometimes be as bad as paying yourself too much (from a tax planning perspective). So long as you have followed steps (a) to (d) above, your ‘My Earnings’ page will produce an accurate calculation of your total gross earnings from your limited company. If your total income from all sources DOES NOT exceed £43,875, then it will calculate how much more you can pay yourself before you reach the £43,875 threshold. You should aim to pay yourself up to the threshold every year if you can afford to (see Retained earnings, below). If your total gross earnings from all sources does not exceed £43,875 you will face no tax charge on any dividends you have paid to yourself – so its best you maximise this tax planning opportunity each year.
(3) Retained earnings
This is very important – don’t skim-read this section. The above two sections talk about taking dividends from your company. You can ONLY do this if your company has sufficient retained earnings to pay out a dividend.
Your retained earnings is not simply the money left in your company bank account. Most of this will be there to cover your company tax bills.
- Dividends can only be paid out of after-tax profits;
- Your company retained earnings is your company bank balance less any tax liabilities it faces to date, such as Corporation Tax, VAT, and PAYE/NI.
If you follow the pay advice emails we send out each time you raise an invoice, and provided you have no company paid expenses other than our accounting fee, then your retained earnings is likely to be small, but you may still have enough to make a dividend payment worthwhile.
If however you have always paid yourself less than our payment advice emails, then you may have significant retained earnings, which you can use to make dividend payments to yourself if your total gross earnings to date does not exceed £43,875.
For our Club Gold clients if you are at all unsure about your level of retained earnings then please just call/email us. For our Gold clients, the company retained earnings is only calculated once a year (at the company year end) which makes this form of tax planning very difficult. If you think this would be useful, we recommend you switch up to our Club Gold service.
(4) Actual payment of dividends
If you are wanting to plan your dividend payments to ensure you get as close as possible to the £43,875 threshold, you need to ensure the dividend payments LEAVE your business bank account on or before 05 April 2011. Any dividend payments that are made AFTER 05 April 2011 cannot be retrospectively applied to the 2010/11 tax year, and instead will apply to the 2011/12 tax year.
(5) Using your pension
Making contributions into your own pension fund is a good way of tax efficiently extracting funds from your company. The downside of course is the funds are tied up in a pension fund for a long time. If you are thinking about making pension contributions, ensure this is done before 05 April 2011.