Legitimate avoidance of the payment of excess Tax is worthy of note, something that wise business people will take seriously and in plenty of time, the existing Tax Year ends in April, time to act!
As of 6 April 2016 the new Dividend Tax regime will kick in and in effect will mean a further 7.5% additional tax due personally on any dividends in excess of £5,000 next year! There are significant planning opportunities available now (before 6 April 2016) that can help alleviate this additional tax for next year and even avoid it completely but don’t leave it too late!
Fully utilising personal allowances, we all have our own tax free personal allowance against income tax liability. For the year 2015/16 it is £10600 with a small adjustment for people born before 6th 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, it is wise to take professional advice because of possible pitfalls. 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. 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%.
Taking profits from your business/dividend or salary, it is important to consider both the tax and business implications of the various options available.
A dividend is paid free of national insurance contributions (NICs), whilst 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. 5th 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 31st January 2017.
Company cars remain a popular benefit for many employees and a 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.