The end of the tax year on 5 April 2016 is fast approaching, and this is always a good time to think about ways to structure your business and personal finances so they are as tax-efficient as possible.
With new rates and various legislative changes due to be introduced for the 2016/17 tax year, here are some of the planning strategies you might wish to consider. Do contact us to discuss how you might benefit.
Utilise personal allowances…
Every individual has their own tax-free personal allowance for income tax purposes, which for 2015/16 is £10,600 for those born after 5 April 1938 and £10,660 for those born before 6 April 1938.
Where a spouse or partner has little or no income, transferring income or income-producing assets to them can help to make the best use of their personal allowance. However, take care to avoid falling foul of the settlements legislation governing ‘income shifting’, and consider the legal consequences of transfers.
Meanwhile, the Marriage Allowance means that in this tax year, up to £1,060 of an individual’s personal allowance may be transferred by eligible spouses and civil partners to their husband, wife or civil partner, where neither pays tax at the higher or additional rate. This can reduce their tax bill by up to £212.
…and beware of the ‘hidden’ income tax rate
In 2015/16, the 40% higher rate of income tax begins when your taxable income exceeds £31,785. However, if your income exceeds £100,000 you could actually be liable to an effective rate of 60%!
This is because your personal allowance is clawed back by £1 for every £2 by which your adjusted net income exceeds £100,000. An individual with an adjusted net income of £121,200 or more will not be entitled to any personal allowance at all, resulting in an effective tax rate on this slice of income of 60%.
However, with care, it may be possible to reduce your taxable income and retain your allowances. Possible strategies include delaying income into the next tax year or increasing your payments into a pension. Please be sure to contact us for advice tailored to your circumstances.
From 6 April, the personal allowance will rise for all to £11,000 for the 2016/17 tax year. The income tax basic rate band will increase from £31,785 to £32,000.
Extracting business profits: dividend or salary/bonus?
When it comes to extracting profit from your company, it is important to consider both the tax and business implications of the various options available.
The question of whether it is better to take a salary/bonus or a dividend requires particularly careful consideration, especially as major changes to the dividend taxation rules will apply for 2016.
A dividend is paid free of national insurance contributions (NICs), while a salary or bonus can carry up to 25.8% in combined employer and employee contributions.
However, a salary or bonus is generally tax deductible for the company, whereas dividends are not. 5 April 2016 is the last date for paying a 2015/16 dividend, and any higher or additional rate tax on that dividend will not be due until 31 January 2017.
The 10% dividend tax credit is set to be abolished from 6 April 2016 and a new Dividend Tax Allowance of £5,000 a year will be introduced. The new rates of tax on dividend income exceeding the allowance will be set at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.
These rates replace the current effective tax rates of 0%, 25% and 30.6%. While there will still be benefits for a director-shareholder taking a dividend over a salary, the amount of tax saved will be less than under the current regime.
You may therefore wish to consider the possibility of increasing your dividends before 6 April 2016, although there may be other tax issues to consider, such as loss of the personal tax allowance if your total adjusted net income exceeds £100,000. Please talk to us about this before taking action.
Company car considerations
Despite increases in tax charges, company cars remain a popular benefit for many employees – and a key business tool for employers. However, tax and National Insurance costs could mean that the company car is not the most tax-efficient option for either employer or employee.
The basis for taxing those who use company cars is to tax a figure calculated by multiplying the car’s list price by an emissions-based percentage (the ‘appropriate percentage’), with a 3% surcharge on diesel powered cars.
Where the employer pays for any fuel used privately by the employee, there is an additional benefit charge calculated by applying the CO2-based car benefit percentage to the car fuel benefit charge multiplier of £22,100 (2015/16).
You might want to consider carrying out a complete review of your company car policy, as it could prove more beneficial to pay employees for business mileage in their own vehicles at the statutory mileage rates.
In some cases, an employer provided ‘van’ may be a viable alternative to a company car. Please speak to us about the best option to suit your circumstances.
From 6 April 2016 there will be a further 2% increase in the percentage applied by each company car band, with similar increases in 2017/18 and 2018/19. For 2019/20 the rates will increase by a further 3%.
From 2016/17, the car fuel benefit charge multiplier will rise to £22,200, while the van benefit charge will increase from £3,150 to £3,170. Meanwhile, the van fuel benefit charge will rise from £594 to £598.
How we can help
These are just some of the areas where we can provide advice on ways to minimise your tax bill. We can review your affairs and ensure you are claiming the expenses you are entitled to (either in your business or against your employment income) look for any planning opportunities surrounding capital allowances and other allowances and reliefs. Please contact us for further assistance.
DISCLAIMER: This article is for guidance only and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.
By Jo Nockels
Last updated January 2016