As we approach the end of another tax year on 5 April 2019, now is the time to make sure that your finances and tax position are structured as efficiently as possible. There may be steps which can be taken to minimise your tax liability or optimise choices for the future.
The first in our Year End Tax Planning series considers company matters. Throughout this text, the term spouse includes a registered civil partner and we have used the rates and allowances for 2018/19.
1. Using the personal allowance
Making use of the personal allowance (PA) for all family members is always prudent. It can be especially beneficial where an individual has no other taxable income and has perhaps routinely carried out work for the business on an informal basis in the past.
Salaries paid at a level realistically reflecting the duties carried out, and made for the purposes of the business, will also attract a corporation tax deduction. Care will be needed to set a salary at an optimal level with regard to National Insurance thresholds. National Minimum/Living Wage requirements and pensions auto-enrolment may also need consideration. Payment to the family member should be formally recorded (so not through the Director’s loan account), as should hours worked.
PA is reduced where total income is over £100,000, by £1 for every £2 of income above this limit. Careful thought should thus be given to deferring such income as you have discretion over – bonus payments and dividends potentially falling into this category. Holding such payments back until the new tax year may produce a more favourable outcome.
2. Using dividends
Dividend payment has traditionally been part of the profit extraction strategy for director-shareholders. Most family companies will pay directors a minimal salary – preserving state pension entitlement, but below the threshold at which National Insurance contributions (NICs) are due – with the balance extracted as dividends. The saving in NICs here can be considerable.
Dividends have their own tax treatment. In 2018/19, tax is paid on dividends at 7.5% for basic rate taxpayers; 32.5% for higher rate taxpayers; and 38.1% for additional rate taxpayers. Taken in conjunction with the Dividend Allowance, £2,000 for 2018/19, this can be very favourable. However, company profits taken as dividends remain chargeable to corporation tax:19% in 2018/19, falling to 17% from 1 April 2020.
3. Planning for Child Benefit Charge
Where someone receives Child Benefit, it is important to remember that although dividends are taxed at 0% within the Dividend Allowance, they still count as income when it comes to High Income Child Benefit Charge. Taking dividend income could potentially trigger an unexpected charge here, and we would be happy to advise further.
4. Timing matters
The timing of dividend payments to shareholders is important, and again the question is whether to make payment before or after the end of the tax year. A dividend payment in excess of the Dividend Allowance, delayed until after the end of the tax year, may give the shareholder an extra year to pay any further tax due. The deferral of tax liabilities on the shareholder depends on a number of factors. Please contact us for detailed advice.
Timing is important with directors’ bonuses, too. Should a bonus be timed before or after the end of the tax year? The date of payment will affect when tax is due, and possibly the rate at which it is payable.
5. Bonus or dividend
Careful judgment may be required when deciding whether a bonus payment or dividend is more tax efficient. Bonuses are liable to employee and employer NICs.
In many family companies, director shareholders have ‘loan’ advances from the company. These are often personal expenses paid by the company: but essentially a director’s loan is any money received from the company that is not salary, dividend, repayment of expenses, or money you have previously paid into or lent to the company.
Such monies are accounted for via a ‘director’s loan account’ with the company. At the year end, the tax position for both company and director depends on whether the loan account is overdrawn – so that someone owes the company money – or whether it is in credit.
Tax charge on the company
A tax charge on the company arises where the overdrawn balance at the end of the accounting period is still outstanding nine months later. For loans made on or after 6 April 2016, this is an amount equal to 32.5% of the loan, but where the balance is repaid, there is no tax charge. This has given rise to the situation where loan balances are sometimes repaid in time to avoid a tax charge, but a further loan to the shareholder is then made almost immediately afterwards. HMRC is keen to ensure that the loan rules are not manipulated, and complex arrangements exist to enforce this. They do not apply however where there is a genuine repayment through the award of a valid bonus or dividend.
This is an area in which HMRC is taking an increasing interest. If you are concerned about whether the tax charge could apply to your company, we would be happy to advise.
Interest on shareholder loans to the company
Where shareholders have injected cash into a personal company, it can be tax efficient to charge a suitable rate of interest on these funds and ensure that this is paid each year. This would normally be a deductible expense in the company and so can overall be more tax efficient than declaring a dividend or bonus. Further tax efficiency may be available where the dividend allowance or starting rate bands are unused. However, the company will need to initially withhold basic rate income tax at source and operate CT61 procedures.
Please do contact us for a review of your individual circumstances.