Here are a couple of suggestions that will reduce or defer your personal tax liability on drawings you make from your business.
If you (or in some cases, another family member) have no other income you may be able to pay yourself up to around £42,000 without paying income tax or national insurance by making best use of the thresholds for national insurance and lower tax rates. In short, you simply pay yourself a small salary that falls short of the national insurance threshold and then top up your earnings with dividends. Be careful however, this is precision tax planning.
The second lesser-known strategy is ‘dividend skipping’. One of the problems with paying tax by self-assessment are payments on account. Payments on account can be reduced to as little as nil if you expect to have less income in the following tax year. If, for example, your income is primarily dividends from a company that you control, then you should consider declaring dividends in alternate years i.e. year 1, year 3, year 5 etc. so that you will not have to make large payments on account for years 2, years 4 and so on. However, you will also need to consider your own needs so this requires careful consideration.
Taking advantage of the 45% rate
The government has announced its intention to reduce the top rate of tax from 50% to 45% for earnings over £150,000 from 6 April 2013. If you are able to structure your remuneration so that you can postpone or defer income to after that date, you will save 5% on that amount.
For some this can be a simple matter of delaying the declaration of a dividend to after 5 April 2013. For others, we may need to help you be more creative.
Contributing to a pension is a well-known tax saving strategy for individuals. What is sometimes forgotten is that it can also be a good tax saving strategy for companies as well.
Why invest in a pension?
• Allowable expense – contributions from the company do not attract income tax or NI
• The fund will grow tax free
• It is no longer compulsory to purchase an annuity at retirement
• You can purchase commercial property through certain pensions, potentially buying your business premises with funds which have not attracted tax, any future sale would also not incur CGT within the pension
• Offering a group scheme to your employees to comply with auto-enrolment