Welcome to our series of Business Tax Tips for 2017. We’ll be giving you 5 of our best tips to cut your tax bill in the year to 31 March 2017. In Part 1, we’ll talk through the best ways to take the profits out of the business.
I will have to take a bit of a broad brush as the details do depend on exact circumstances, but here are my top 5 tax-saving tips for Limited Companies in the year through to 31 March 2017.
Tip Number 1 is all about taking the cash out of your Limited Company. And it really has changed since last year due to the new rules.
The first thing to consider is your salary.
If you have a Ltd Co, traditionally the most tax-efficient route is to pay a salary up to the National Insurance threshold and then take additional cash as a dividend. In the 2016/17 year, the figure is £8,060.
This is because you get Corporation Tax relief in your company at 20% but pay no personal tax on the salary. In the past, you also got your dividends tax free until while you were a basic rate taxpayer.
The tax on dividends has changed but the principle remains the same in keeping your tax bill as low as possible.
A couple of years ago, there was a change as the new Employers National Insurance allowance gave £2,000 of “free” Employers NI. For many entrepreneurs with no employees, this meant it was worth increasing the salary up to the personal allowance.
However, the rules have changed again this year – the allowance has increased to £3,000…..but only if you have employees.
Therefore, as a starting point, the most tax efficient salary is:
- £8,060 if you’re the only Director/employee
- £11,000 if your total Ers NI bill is less than £3,000
- Somewhere in between if you have a few staff
Therefore, it really is worth getting an accountant to look at your specific circumstances.
Of course, you should look at other ways of using tax reliefs. If you have a spouse or family member who isn’t using their £11,000, you can pay them a salary. Or, if they’re a basic rate tax payer, you may want to give them shares as their dividends will be tax free.
Secondly, you should think about the timing of your dividends on a year-by-year basis.
As the owner of a Limited Company, the timing of your personal tax is in your hands – it’s one of the benefits of a Limited Company as opposed to a sole trader.
This means you should keep an eye on some of the main thresholds for personal tax and, if you’re close to one of them, consider delaying dividends until the next tax year.
The thresholds are:
- £11,000 is the tax-free personal allowance
- £43,000 is maximum you can earn as a basic rate taxpayer
- At £50,000, you start to lose any child benefit payments
- At £100,000 you start to lose your personal tax-fee allowance.
- And, at £150,000 you become an additional rate taxpayer, ie you pay 45% tax on any additional income during the year.
Thirdly, you should consider a pension to cut your tax bill.
Another way of reducing your income is by paying into a pension – these can be really tax-efficient. If you’re considering a pension, you should talk to an Independent Financial Adviser as there are lots of different types.
So, that’s Business Tax Tip Number 1 for the year – the best ways to take the profits out of the company. I hope you found that useful. I’ll be back soon with Tip Number 2 on how to minimise your VAT bill.
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Added by Jon Davies
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