The 2019/20 tax year ends on 5th April 2020. With this date approaching, it may be a good time to consider whether you are operating as tax efficiently as possible this year and consider following the recent budget whether you want to plan to make any changes for the new tax year.
Use your personal allowance
If you are taking a salary under the personal tax allowance (£12,500 for 2019/20) and have no other income, it may be wise to utilise the remainder of this by declaring dividends from the company’s available profits, as no element of an un-used personal allowance can be carried forward.
The budget confirmed that the personal allowance for 2020/21 is set to remain at £12,500.
Dividends can only be taken out of your company’s post-tax profit, with personal tax being paid by the shareholder receiving them as follows:
0% on any dividends that are covered by the personal allowance
0% on the first £2,000 of dividends declared in excess of the personal allowance (this is covered by the dividend allowance)
7.5% Dividends in the basic rate band
32.5% Dividends in the higher rate band
38.1% Dividends at the additional rate (total income in excess of £150,000)
If you have not declared any dividends this tax year it may be sensible to ensure that you utilise any remaining tax-free allowances that you may have.
If you have received less than £50,000 of income during 2019/20 you will still have some of your basic rate tax band left over. As dividends are only taxable at 7.5% in this band you may wish to declare these dividends before the end of the tax year.
We have not seen any changes for 2020/21 in the rates of tax or the basic rate and higher rate thresholds.
Contribute to a pension
The annual allowance for personal pension contributions is currently set at £40,000 or 100% of your earnings (excluding dividends) per year – whichever is lower. Making pension contributions personally could also mean that more of your income is taxable at a lower rate.
You can carry forward any unused allowances for the past 3 years, assuming you have had a pension in place for this period. If you haven’t done so already, you may be able to benefit from additional tax relief by making the most of these contributions.
In the budget the chancellor confirmed that there would be changes to the way pensions taper relief is applied for higher earners. Currently taper relief starts to apply to the annual pension contributions limit of £40,000 when income (inclusive of pensions contributions) reaches £110,000. The chancellor confirmed that this threshold will be increased to £200,000. This has been introduced to address the negative impact on senior NHS staff, however it will apply to all taxpayers from 6th April.
Review your shareholding
In certain circumstances it can be tax efficient to gift some shares to your spouse, assuming that you are legally married and living together. If you would like to discuss this further please let your accountant know.
Please note that, should you gift shares to your spouse, they will then become their property. Any dividends declared after the transfer would then be split per the new shareholding and will need to be paid to them; tax will be calculated based on the dividends that each shareholder receives and will be payable by the shareholder.
Changes to Entrepreneurs relief
In the lead up the budget many commentators speculated that Entrepreneurs Relief would be scrapped. Contractors will be relieved to hear that this did not happen. However, there were changes to the lifetime limit which saw this being reduced from £10 million to £1 million. Whilst this will not impact most contractors it is worth bearing this in mind.
What else should you be aware of?
Payments on account
If your tax liability is greater than £1,000 for the 2019/20 year, HMRC will require you to make further payments on account (in advance) towards the 2020/21 liability by 31st January 2021 and 31st July 2021 (these are each usually 50% of the tax liability for the prior year).
Remember, If you have a student loan, dividends count towards your income and hence if you have breached the repayment threshold (£19,390 for Plan 1 or £26,575 for Plan 2) there will be a student loan repayment required at 9% of any income received in excess of the threshold.
Residential property disposals
From 6th April 2020 any disposal of residential property which generates a taxable gain must be reported to HMRC within 30 days. This will only apply where there is a taxable gain so you won’t need to worry about this if you sell your main residence.