Getting the best tax rate for you
Maximising tax free income is always a good thing. The introduction of the dividend and savings allowance has created some greater tax planning opportunities for remuneration planning for small owner managed businesses. With the announcement in the last Budget that the dividend allowance may reduce from 6 April 2018, it is worth revisiting these opportunities.
For basic rate taxpayers with non-savings income (i.e. pension income, salary, rents or self-employed income) within the personal allowance, it is now possible to receive up to £6,000 of interest tax free, by taking advantage of the “starting rate” for savings.
For example, where the business owner (company shareholder) has lent their company money and therefore has a balance owing to them on a director’s loan account, interest could be paid. In the example below, Geoff has lent his company £100,000 and in the current tax year he takes a salary of £8,000 (non-savings income at a level where no National Insurance is payable either), interest on the his loan of £9,000 and dividends of £5,000.
This is through the following:
Geoff can therefore receive £22,000 from his company completely tax free. The example could be taken further by increasing dividends to £26,000 to fully utilise the basic rate band. The additional dividend would be charged to income tax at 7.5%, resulting in a personal liability of £1,575 on total income of £43,000, an effective tax rate of 4%.
For more information on Maximising Tax Free Income, please get in touch with any of our experts in the Agricultural Team
This article can be found in the AG Rural Intelligence Summer 2017 Newsletter