As a company director, it’s important to be proactive about maximising your personal income from the business – and that means keeping a regular eye on your wealth planning to make sure you’re being as tax efficient as possible with your payments, dividends and other benefits.
It’s important to keep up to speed with changes in taxation and the allowances that you might qualify for. And changes to the current dividend allowance are about to take effect that could have a significant impact on your tax bill, once the self-assessment year end comes around.
Here’s our quick overview of how to get the most from your income as a director.
Getting your personal finances in order
As a business owner, you’ll already be paying corporation tax on your limited company’s profits. But as a director of the company, you’re also legally required to submit a personal income tax return in January of each year – covering income and benefits you’ve received in the tax year.
With your income potentially made up of a mixture of PAYE salary and dividend payments, and with pension payments and directors’ loans to also take into account, it’s easy to see how director’s pay can quickly become a complex matter.
It’s important to stay in control of your finances over the year, and that means making sure you keep detailed records of any money you’ve been paid by the business, any transactions relating to the company that you’ve made using your personal credit cards, and any benefits you’ve received over the year.
In short, it breaks down to three key maxims:
- Be organised – keep records of all payments, benefits and personal transactions
- Be transparent – be open and honest about any income you’ve received
- Go digital – keep your records in the cloud, so they’re easily accessible at year-end.
If you’re organised, transparent and utilise the benefits of cloud storage, completing your self-assessment income tax return will be a far easier task – whether you’re doing it yourself, or handing the task over to us.
Changes to the dividend allowance
As we mentioned at the start, changes to the dividend allowance are likely to have an impact on any income you receive after April of this year. But what is the dividend allowance?
The dividend allowance for limited company directors was first introduced back in April 2016. It replaced the old rules around dividend payments to shareholders and gives each individual a £5,000 tax-free allowance.
For any amounts over that £5,000 limit, your income is taxed at three different rates:
- 5% for basic rate
- 5% for higher rate
- 1% for higher rate
The bad news, if you’re a director, is that the allowance has now been slashed to £2,000. Philip Hammond, the Chancellor of the Exchequer, announced in Budget 2017 that the dividend allowance would be cut from £5,000 to £2,000 from April 2018 – a move that will affect the tax planning of a lot of limited company directors.
If you think you’re likely to be affected, do call us to talk through your tax-planning option.
Using your pension in a tax-efficient way
Pensions can be a useful tool when it comes to your annual tax planning. People tend to neglect paying into a pension scheme when they’re the owners of a company – but that’s not great for your long-term wealth planning.
As a director, you’re not caught by the auto enrolment legislation, so there’s no key requirement to consider paying into a pension. But there is tax relief available to directors if they pay into a personal pension scheme, so that saves you the corporation tax element by paying into the pension and reducing your overall taxable profit for the year.
In essence, you’re saving for the future without taking any money out of the company and paying tax on it.
Sensible planning protects your income
As with most things in business, looking ahead and applying some sensible planning will help you to protect your dividend payments and make the most of your income from your limited company – and that is where our regular tax-planning meetings become beneficial.
If you’re concerned about the drop in the dividend allowance, or want to review your personal wealth planning in general, please do get in touch for a chat.
Drop us a line and let’s see how we can help with your tax planning