Kwasi Kwarteng’s barely settled into the Chancellor’s chair – but the income tax shake-up in his first mini budget is causing shockwaves throughout the economy. There are, though, other ways to minimise the amount of your pay that you send to the Treasury. All it takes is a spot of planning and some smart thinking about how to make the most of tax-free initiatives.
If you’re a director/shareholder of your business, you only pay tax and National Insurance contributions on profits you take out of the company.
The profits you leave in are protected from personal tax.
Of course, you’ll need to take some money out. How best to do that without landing yourself with a whopping tax bill? Let’s take a look.
Income allowances
The simple answer is, there’s no simple answer.
“The best combination needs to consider personal circumstances,
tax efficiency and simplicity,” says Northern Tonic MD Rob Ormiston.
That calculation starts by understanding your personal tax-free allowances. You don’t pay tax on the first £12,570 you earn each year. This is known as your personal allowance. Taking some of your income as dividends means you can bag another £2,000 a year before tax kicks in.
Pension contributions
Pension contributions are extremely tax efficient because they’re fully allowed against tax for the business and the individual – great for anyone but even better if you’re a shareholder/director.
For the company, that means for every £1 they put into the scheme, they save 19p of corporation tax. In other words, £1 costs just 81p.
Individuals aren’t taxed on contributions either – and you can put in up to £40k a year. And, if you haven’t been making the most of this allowance, the good news is, you’re allowed to go back three years and catch up with your contributions.
Of course, saving tax against pension contributions requires a very long-term view but if you’re happy to save for retirement, it’s effective. ISAs aren’t quite as tax-effective as pensions, but the bonus there is that you can get at your money in the short or medium term.
Lending money to your business
As a company director, you can loan money to your business and claim interest tax free – up to £1,000 for basic rate tax-payers
As long as there are no restrictions on loans in your articles of association, you can draw up an agreement, detailing the amount of the loan and how and when it will be repaid.
The interest that the business pays on the loan is included as an expense to deduct against corporation tax. That interest will be counted as personal income, so you’ll need to include it in your personal tax return, but you’re entitled to a personal savings allowance, which lets you earn up to £1,000 a year in interest tax free for basic rate tax-payers. So as long as you charge a rate of interest that keeps you within that allowance, you will receive it tax free.
This savings allowance applies to all personal savings – simply keep an eye on your interest payments across the board if you want to stay within the £1,000 a year allowance.
Smarter savings
If you have savings, you should be using your ISA allowance. Aside from the personal savings allowance, you can invest up to £20,000 a year in an ISA, where any interest and capital gains are tax free.
And the different types of ISA mean you can choose from a simple deposit account to complex individual stocks and shares – and several options in between. With varying levels of risk and interest payments, it’s worth shopping around for the deal that suits your savings personality.
Capital Gains
You pay Capital Gains Tax on the profit you make when you sell something that’s increased in value (although that doesn’t usually include your car or your main home).
Again, there’s an allowance before the tax kicks in: £12,300 a year for individuals. There are smart ways of reinvesting profits, so speak to a wealth manager about the best ways of making your money work
for you.
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