We’re fast approaching the end of the tax year on 5th April, and now is usually a good time to get to grips with any tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year.
You’ll also want to stay up-to-date with the current tax rates and thresholds.
We take a look at what you’ll need to know.
If you prefer, you can skip straight to our recent End of Tax Year webinar.
Make sure you take company dividends before 5th April 2018
It is important dividends are issued and paid by your company before 5th April to be classed as a 2017/18 dividend in your personal Self Assessment with HMRC. This is important to ensure you are maximising your tax efficiency by utilising your tax free allowances and HMRC tax thresholds.
As a reminder here are how dividends are taxed in 2017/18 and 2018/19.
|Dividend tax-free allowance
|Dividend basic rate – The lowest rate of tax on dividends
||7.5% on earnings up to £33,500
||7.5% on earnings up to £34,500
|Dividend higher rate – The middle tier of tax on dividends.
||32.5% on earnings above the basic rate up to £150,000
||32.5% on earnings above the basic rate up to £150,000
|Dividend additional rate – The top rate of income tax for high earners.
||38.1% on earnings above £150,000
||38.1% on earnings above £150,000
Note: The dividends basic and higher rate thresholds above don’t include the Personal Allowance above.
How much can I take in dividends?
Assuming that you’ll have no other income or benefits in kind, such as rental income, external dividends, a company car, or other employment income, here is how company dividends will be taxed.
For example: if you had a benefit kind with a cash value of £1,000, it would reduce the Personal Allowance and other thresholds by £1000, as it counts as salary when calculating tax.
For the 2017/18 tax year, provided your only personal salary is £8,164, then you can take up to £8,366 in dividends tax free, by using your Dividend Allowance of £5,000 and your remaining Personal Allowance.
The next £28,500 in dividends is then taxed at the basic dividend rate of 7.5%. This means you can issue up to £36,836 in dividends with a £8,164 salary. This will result in £2,137.50 in income tax being due with HMRC by 31/01/2019.
Any dividends above £36,836 are then taxed at 32.5% until total income is £100,000. After this point your Personal Allowance reduces by 50p for each additional £1 you earn until the Personal Allowance is exhausted.
Once your total income is above £150,000 then further dividends will be taxed at 38.1%.
Remember though, if you have other sources of income this will mean more tax will be due, as the basic, and higher thresholds will be used quicker.
Make sure your records are up to date
When issuing dividends it is important to make sure that your accounting records are up to date. For users of cloud software, such as Crunch, your business bank account should be reconciled and your company accounts must be up to date – with all expenses, pension contributions, salaries, and paid invoices accounted for.
This means you’re able to make an accurate assessment of your company profits and any tax due. You can then calculate the dividend you’re allowed to pay yourself.
Don’t forget that any dividends must come from available company profits. If you take more than is allowed you could face penalties and interest as it’s treated as a Director Loan.
Payroll deadlines and submissions
If you’re running payroll, even for a single employee, then you mustn’t forget to file your final Full Payment Submission. This is an HMRC Real Time Information (RTI) requirement and you could face a £100 fine for each month you delay if you don’t file your end of year Full Payroll Submission (FPS) by 5th April 2018.
You should record payroll runs for March to maximise your tax efficient directors salary, for the tax year 2017/18 we usually recommend a salary of up to £8164, so check the amount you have been paid since 6th April 2017.
For Crunch clients: As soon as the 6th March arrives, you can record your final payroll run for the current tax year. To do this on the final payroll run HMRC require you to indicate this is your last payroll for the year by selecting ‘Yes’ when asked.
How can you maximise your tax-efficient savings through pension contributions?
If you want to make pension contributions this year, you need to make sure these payments are received by your pension provider by 5th April. You can make these through payroll or employer contributions, so you’ll need to ensure this is done in good time. The total amounts that can be contributed per year and still be tax free is £40,000
While you’re thinking of future investments, you may want to check if you could make any payments into an ISA or other tax efficient savings which also have limits on what you can pay in each tax year.
Please speak to your pension and investment advisor for more information and bespoke advice. If you don’t have an advisor then we can help. Find out more about our Investments and Pensions advice service.
Year end responsibilities
With many limited companies choosing to have 31st March as their financial year end, it can be a daunting undertaking for first-time limited company directors, but with our comprehensive year end checklist you’ll know exactly what you need to do.
What changes will there be from 6th April 2018?
Normally, there are a few changes that you’ll need to be aware of but, thankfully, there aren’t too many this year.
We’ve put together an article with the full list of relevant tax and accounting changes.
Webinar: Nine Top Tips for End of Tax Year
In our recent webinar session, Ben Schaefer and our award-winning Senior Accountant Chris Barnard explain what you need to do to ensure you’re ready for the end of tax year. We’ll also give you a heads-up of what changes are on the way that might affect you and your business.
For audience questions from the webinar, see below.
Read on to find out more about your end of tax year responsibilities.
Your End of Tax Year questions
Has anything changed that affects whether it’s worth becoming VAT registered or not, or which type of scheme to join for FY 2018/19?
None of the changes from 6th April 2018 should affect whether or not a small business should be VAT registered.
As of 6th April 2017 (when the limited cost trader rules came into place) lots of clients whose turnover is under £85k may now be better off on the standard scheme or it could be worth deregistering from VAT. It’s important to speak with your accountant to get bespoke advice on your personal situation.
How about the impact of IR35 on our calculations?
If your contract with a client is outside of IR35, then normal rules apply. However if your contract(s) are inside IR35 then most (or all) of your income should be paid as a salary. Once this salary has been paid there might be a small dividend left to issue. If this is the case, your accountant will advise on this.
As a Crunch client, once final payroll and dividends are taken at the end of this month, does the Crunch system submit everything to HMRC, or do I have take action to confirm submission to HMRC?
Once you issue and pay dividends they become taxable in the eyes of HMRC. This is the point you record these dividends in your personal Self Assessment. Crunch can prepare your self assessment if you need us to.
Our system automatically provides Crunch clients with the legal documentation needed, which includes board minutes and dividend vouchers. This is evidence that shareholders have approved the payment of dividends.
Can someone register a limited company with their children as shareholders, with shares acquired through money provided to them by grandparents?
This is something Crunch would normally advise against because it could be seen as tax avoidance. There are situations this might be allowed, but it’s complex and you’d need the advice of an accountant depending on your specific circumstances.
With regards to Childcare Vouchers – I have been paying these direct from my company and claiming as an expense. Is this still OK in 2018/19?
Provided you’ve already joined a scheme, you can continue this going forward. HMRC has not set a deadline on this. However if you’re not already on a scheme you have until 5th October 2018 to start one, otherwise you can only use HMRC’s new Tax-Free Childcare scheme.
How does holding bonds/shares affect your tax allowances?
As these are assets that could increase in value, you’ll pay Capital Gains Tax if you’ve made any profits after these are sold. If you receive interest or dividends from these assets then income tax will apply and would be treated as income, which would affect your Personal Allowance (and other income tax thresholds).
As company director, can I invest company profits into bonds or mutual funds?
There might be some tax advantages of this, but it will make your accounting more complex and expensive. Before making a decision you need to speak with a financial advisor who can provide bespoke advice on investments. Once you have this advice, please speak with your accountant who will provide advice on the tax implications.
What is the annual cost amount I can claim for working at home through a limited company?
If you’re working from home you can claim £208 annually (£4 per week) to cover associated costs without receipts. If you want to claim more than this you would need to set up a rental agreement between your company and the property owner (even if it’s you who owns the property). Your accountant will be able to run some more complex calculations in order to establish allowable amounts.
Can I issue dividends (within my allowance based on profits) if the funds are not immediately available in my company bank account? In other words, I would make use of my 7.5% bracket this year by issuing the dividends now, but only withdraw the funds when my new invoice comes in (already certain) in May 2018.
If you have profits available you can issue dividends. Dividends issued when you do not have profits available may be illegal. You should always keep sufficient funds available in cash to pay your tax liabilities.
I have payroll run setup in Crunch, do I need to inform my client manager about the final payroll, or is it already taken care of?
If your payroll is recurring in Crunch this will be done automatically.
If you’re doing it yourself then you would need to manually enter the payroll run, and at the end mark it as your final payroll run for the year.
If I’ll be using my personal car for commuting to my new contract in the new tax year and am looking to upgrade it, am I correct in understanding that you recommend buying one (a hybrid) via the limited company to be more (personally) tax efficient?
When buying buy a new vehicle the lower the CO2 emissions and list price, the lower the tax should be.
From April 2020 it’s proposed that this tax is also calculated on the vehicle range for hybrid vehicles. This means if you’re buying a vehicle to use for more than two years, hybrid cars are a good low tax option.
Before buying the vehicle please speak with your accountant, as sometime claiming mileage is more tax efficient than having a company car. They will consider your earnings, other benefits, vehicle type, and business mileage travelled in a year.
What’s the best option to invest company cash?
This type of advice can only be provided by a financial advisor, your accountant can help with the most tax efficient way to take money from your company, but not on the best way to invest it.
Need some help?
All of the above comments are for your information only. We always recommend speaking to an accountant for more in-depth analysis of your circumstances. If you don’t have an accountant or are looking to switch, give our friendly team a call on 0333 311 8000 or arrange a free consultation.