As we approach the end of the 2023/24 tax year, you may wish to consider whether you and your Limited Company are operating in a tax-efficient manner. This applies to both your company’s and your personal finances.
Here at Caroola, we are focused on providing you with any support you might need to achieve this.
We have provided a list of key points of which to be aware. If you wish to discuss any of these options further, feel free to get in contact with your accountant by either phone or email.
Utilise your tax-free allowance
The 2023/24 personal allowance grants you £12,570 of tax-free income. If you are taking a yearly salary below the personal allowance and have no income outside of the company, you may wish to utilise the remainder of this allowance by declaring dividends.
In addition to the personal allowance, you also receive a £1,000 tax-free dividend allowance which you can utilise. No matter what your income level is, the first £1,000 of dividends declared will be tax free. In order to utilise this, all dividends must be declared by 5th April 2024.
Maximising your tax band
As a director and shareholder operating outside of IR35, you are free to take a salary of your choosing, as well as top up your income with dividends. In addition to this, the salary taken will also be an allowable expense, providing your company with corporation tax relief.
Dividends can be paid as frequently as you like, so long as you have the profit available to pay them. There is no requirement to pay dividends at all if you do not wish. This means that you, as a shareholder, have the flexibility to declare dividends in the most tax-efficient manner for you and you company.
If you have not already, and if the profits are available, you may wish to consider maximising your tax bands. This is where you, as a director/shareholder, can take additional profits as salaried income for yourself in order to make the most of the lower income tax bands that might be available to you.
For reference, here are the income tax rates and bands for the 2023-2024 tax year:
- Personal Allowance – Up to £12,570 – Taxed at 0%
- Basic rate – £12,571 to £50,270 – Taxed at 20%
- Higher rate – £50,271 to £125,140 – Taxed at 40%
- Additional rate – over £125,140 – Taxed at 45%
You cannot carry forward any unused tax-free allowances or lower tax bands, so if you do wish to maximise them, you must do so before the end of the current tax year. Again, this is providing you have the profits available.
If you would like an illustration of how this might work, tailored to your personal situation, let your accountant know. They will be more than happy to help you.
A breakdown of the tax bands can be found here.
Pension Planning
Paying into a pension is a tax-efficient way to either a) extract funds from the company, or b) minimise the tax impact from the higher tax bands. You can pay a maximum of £60,000 into your pension pot in the 2023/24 tax year. This allowance can be utilised as a combination of personal and company contributions. It is also proportionally reduced, depending on your level of income. Taper relief begins to apply when your adjusted net income exceeds £260,000. Please let your pension provider or financial provider know if this applies to you, so that this can be planned for accordingly.
Company contributions to staff pension pots are deductible from profits before tax, provided that the contribution made is entirely for business use and forms part of a reasonable remuneration package. Meanwhile, if you are a basic rate tax payer and pay part of your salary into your pension pot, the government will add the 20% it would have taken in tax from that portion of your salary on top of it. By paying that part of your salary into a pension, less of your income remains as taxable.
Tax relief on personal pension contributions is capped at either £3,600 or 100% of your relevant earnings for the year (whichever figure is higher, and only up to an income of £60,000). Relevant earnings exclude any dividends, so if your only income from your company is a low salary and dividends, you would be restricted to a gross personal pension contribution in line with the salary taken.
Any unused pension allowances can be carried forward for up to three years, provided you had a pension plan in place at that time that allows you to utilise 3 years’ worth of allowances in the current year.
If you wish to take advantage of pension payments, you should ensure they are with your pension provider by 5th April 2024.
If you are interested in setting up a pension, we can help. Please contact your accountant to discuss, or feel free to review our Caroola Financial Planning page.
Review your shareholding
It can, in some circumstances, be tax-efficient to gift shares to a spouse or civil partner. There are strict rules around the gifting of shares, so please contact your accountant to discuss these further. Alternatively, you can read more here.
If you do decide to gift shares, you should be aware that this will entitle the holder to a proportion of the business. This, in turn, gives them a right to dividend income, as well as voting rights. Any dividends declared after the gift has been actioned must be split as per the new shareholding. The tax rate applied to these dividends will be dependent on the total income received by the shareholder, including any income earned outside of the company.
Additional points
Payments on account
You are required to make payments on account to HMRC unless you fall under one of the following two categories:
- Your Self-Assessment tax bill was less than £1,000.
- 80% or more of your tax was deducted at source through PAYE.
Payments on account are a pre-payment of the following year’s tax bill made in two instalments: one on 31st January and a second on 31st July, following the end of the tax year.
E.G. If you have a £10,000 tax bill for the 2023/24 tax year you would have the following payments to make:
- 31st January 2025:
- Balancing payment – £10,000 (this may be reduced if payments on account were made in the prior year)
- 1st Payment on account – £5,000 towards the 2024/25 tax year.
- Total due – £15,000
- 31st July 2025:
- 2nd Payment on account – £5,000 towards the 2024/25 tax year.
You can, if you like, reduce the payments on account to as low as £0.00. However, if a tax bill does arise in the following year, HMRC may charge interest on the element that was reduced.
Student loans
Both salary and dividends count towards your income for student loan purposes. If your total income exceeds the repayment threshold, the loan repayment will be based on 9% (6% for postgraduate loans) of your overall income above the repayment threshold. This is for students who studied in England; other parts of the UK will vary. More details on student loans can be found here.
Child benefit
If your overall net adjusted income exceeds £50,000, HMRC will ask that you begin to repay any child benefit received in the period. This is done proportionately on income between £50,000 and £60,000, with all child benefit received being repaid once you earn £60,000.
Capital Gains exemption
The tax-free capital gain exemption currently sits at £6,000, and will fall to £3,000 in the 2024/25 tax year. As such, you might wish to consider taking advantage of the higher Capital Gains tax allowance while it is still in effect.
Next steps
There are many things to consider before the end of the tax year, and we know that it can get overwhelming. Why not take advantage of the time you have between now and 5th April 2024 and get in touch with your Caroola accountant for tailored advice, based on your specific circumstances?
