Planning Your Director’s Tax [PART 2]

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Following the new tax year, there are new updates to allowances and taxes as shared by the UK government. As directors and business owners, it’s important for us to keep abreast with these figures - such that planning our taxes and managing our company finances becomes easier. 

In the second part of our blog post, let’s take a look at efficient ways to maximise profit-extraction for your 

 

1. Avoiding High Marginal Tax Rates

There are several 'cliff edges' where an individual's gross income exceeds a certain level and the marginal tax rates are disproportionately high.

Here are ways you can avoid higher marginal rate tax:

  • Split income-producing assets with a spouse or partner.
  • Make pension contributions and Gift Aid donations. 
  • Obtain a short-term loan from the company to enable them to make additional pension contributions in one tax year to reduce income. 
  • Watch out for the cap on unlimited Income Tax loss reliefs. This may affect an entrepreneur's ability to deduct losses from self-employment against earned or investment income.

 

2. Maximise Income and Asset Splitting

You can make full use of your personal allowances of your spouse or civil partner, which includes a share of £2,000 in dividends. For an automatic equal split of income between spouses or civil partners for tax, it’s best to put property into joint names with them. 

  • For example, to split interest on a bank account 50:50, add the spouse's name to the account. Where it is more difficult to change legal title, prepare a declaration of trust declaring joint ownership.

To split income from any property other than 50:50, then ensure it is in joint names as tenants in common. Here, you can also prepare a declaration of trust confirming the split of income. 

 

3. Planning Director’s Loans 

If a director is in danger of falling into a higher marginal tax rate, you can forgo dividends for a month or two and live off a temporary loan provided by the company.

Here are some general planning points should you decide to take up a director’s loan: 

  • Shareholder approval is required for any loans made to directors that are in excess of £10,000 
    • If this loan is to meet expenditure on company business, though, the amount is then £50,000 
  • Make sure there is approval when you go about your loan, to prevent it from becoming a criminal offence 
  • Avoid too many long term loans, as this could change the trading status of the company since loans are non-trading assets. This potentially affects the business asset status of the company's shares for CGT or IHT relief.

 

4. Planning tax with business combinations

It can be beneficial for a limited liability partnership (LLP)  to be set up alongside a company and run in a service role. 

  • An LLP can be used to hold assets such as cars, boats and other assets which, if owned by a company, would result in a taxable benefit charge.
  • However, make sure these charges are made on a commercial basis, as HMRC may challenge arrangements where the expense is not wholly and exclusively incurred.

 

We hope this was a useful guide in helping you learn more about different ways you can maximise extracting your profits, as well as planning your taxes as a director. 

If you need further help, don’t hesitate to reach out to us - Right Accounts professional and affordable tax-filing services for all individuals alike. 

You can contact us here

IMPORTANT: If you receive texts, calls or emails claiming to be from HMRC, offering financial help or a tax refund and asking you to click on a link or to give personal information, it is a scam. You should email it to [email protected] and then delete it.

 
 
 
 
 
 
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