As the 2019/20 tax year draws to a close, there are some simple tax planning…
The problem with tax is that new tax law is constantly being created to reward certain behaviours and discourage others. To be fair this is probably essential for economic and social management however it does create a myriad of choice for the taxpayer to navigate.
Running your own limited company is an area full of choice and step one is to remember that there are at least two of you! Regarding the profit the company makes and you draw, you are one taxpayer (liable to income tax and primary national insurance) and the company is another (liable to corporation tax and secondary national insurance).
If you pay yourself a salary you can be liable to income tax and primary national insurance whilst your company can be liable to secondary national insurance, but not corporation tax, on that money. The income tax and two national insurance liabilities soon add up and so generally salaries are kept low to avoid or at least minimise these liabilities.
If you allow the company to pay for items for you, such as gym or golf club membership you are liable to income tax and the company is liable to national insurance on such benefits. However there are exemptions, such as one mobile telephone contracted in the company’s name per employee, and payments which do not create liabilities.
For example pension contributions paid by your company, subject to the annual maximum, are not charged to income tax or national insurance in your hands or corporation tax or national insurance in your company’s hands. You can pay a pension contribution larger than your salary if it is paid by the company rather than by you. So pensions are a tax efficient way of drawing money from the company and although there are restrictions on when and how you access pension funds, there is much more choice now that we have pension freedom legislation.
If you lend your company money to use in the business then you can receive interest. With earned income low you can benefit from both the 0% starting savings tax rate and the new savings allowance.
Although taking dividends from your company is less tax efficient under the new rules then they used to be, an individual can still receive £5,000 in dividends per year tax free.
All these choices add up. If the personal allowance for salaries, the starting savings tax rate, the new savings allowance and the dividend allowance are all utilised then £22,500 per director during 2017/18 can be tax free and you still have the option of a tax free mobile phone and company pension contributions.
If you run your own limited company, or know someone who does, and would like to discuss the above we look forward to hearing from you!