With the end of the tax year fast approaching there are many things that contractors can consider to ensure they are operating as tax efficiently as possible. With the changes that are coming in to place in the 2016/17 tax year it is now more important than ever to ensure that you are utilising the options available to you as a Limited Company contractor this tax year.
Take all of your basic rate dividends
Dividends that are taken in the basic rate of tax are tax free and it is therefore tax efficient to make use of these tax free allowances. You can refer to the tax planning tools that are provided by your accountant to see if you have any tax free dividends remaining. You should consider how any other income that you receive affects the amount of tax free dividends that you take and ensure that you have the reserves available in the company to be able to issue a dividend.
On the basis that you have a salary of £10,600 this tax year and have no other income you can take approx. £28,600 in dividends tax free in the 2015/16 tax year. If you are taking a salary of £8,060 and have no other income then you are able to take approx. £30,890 in tax free dividends in the tax year. If you have other income or have had other employment in the tax year your accountant will be able to advise of how much you can take as tax free dividends.
Take more dividends this year if you are going to be a higher rate tax payer next year
With the dividend tax credit being withdrawn in the 2016/17 tax year dividends are taxed at a flat rate of 32.5%, whereas in the current tax year dividends are taxed at an effective rate of 25%. So say you take £1,000 in dividends as a higher rate tax payer this tax year you will pay £250 in income tax, whereas next year you will pay £325.
Once your overall gross income exceeds £43,000 next year you will be a higher rate tax payer, so if you have reserves available to take in your company and you expect to be a higher rate tax payer next year it is tax efficient to take more dividends in the current tax year.
There are other factors that should be considered if you are considering taking further dividends such as:
- Student loan repayments when your income is over £17,335 or £21,000 depending on when you started studying.
- Child benefit charges once your income exceeds £50,000
- The gradual withdrawal of your personal allowance when your income reaches £100,000
- Payments on account on your personal tax return
- Whether you require an Income assessment for things like child benefit or university funding.
Make additional contributions to your Pension
You can currently pay £40,000 per annum in to a pension directly from your Limited Company without there being any personal tax implications. This allowance is based on the tax year so you should make any additional payments before the end of the tax year. You can also receive additional tax relief for the previous 3 years if you had a pension in place and did not make use of your allowances. The allowance for the 2012/13 and 2013/14 tax year was £50,000 and for 2014/15 was £40,000.
This is particularly important if you have a large amount of reserves in the company and is tax efficient due to your Company receiving Corporation Tax relief on any pension payments as they are a tax deductible expense. So say you pay £1,000 in to a pension this will only cost your company £800 as your company will save £200 in Corporation Tax.
Pay funds in to your Individual Savings Account (ISA)The tax free ISA allowance for 2015/16 increased to £15,240. If you have taken advantage of withdrawing funds from your ISA on the new regime you have until 5 April 2016 to pay these funds back without affecting your ISA allowance for 2015/16.
Hold off replacing items of furniture for any rental properties
The 10% wear and tear allowance for rental properties is being withdrawn from 5 April 2016 and being replaced by a deduction for the cost of actual replacement of furniture or white goods. It is therefore worthwhile waiting until the new tax year to replace any goods so that you can claim the wear and tear allowance this year as well as get the relief in the next tax year.
Utilise your tax free Capital Gains Tax allowance
Everyone has a Capital Gains Tax allowance of £11,100 each year. This means that you can sell or dispose of assets such as stocks, shares, jewellery and property worth over £6,000 without paying any tax on the first £11,100 of the gain.
The tax advice that is provided to contractors this year is on a case by case basis due to the various different factors that need to be considered so if you make your accountant aware of the factors relevant to you they can advise accordingly. Within our all-inclusive package you will receive unlimited support from your own dedicated accountant and we will provide tax planning tools for the current tax year and the 2016/17. Contact us on 0330 024 0406 today to find out more.
