By Connor Smith, Accountant at Hive Business
Us lucky accountants get two new year celebrations each year, the end of the calendar year and the end of the tax year. The 5th April comes and goes every year, and each year there are usually changes to tax rules that you could miss out on, meaning you aren’t being as tax efficient as possible.
The end of the tax year is as good a time as any to review your income and assess whether there are changes to be made to your personal income structure to best utilise the available tax bands.
Important Tax Tables
| Tax Year 2019/20 | Amount (£) | Tax Rate |
| Personal Allowance | 12,500 | NIL |
| Dividend Allowance | 2,000 | NIL |
| Basic Rate Band | 0 – 37,500 | 20% (7.5% Dividends) |
| Higher Rate Band | 37,501 – 150,000 | 40% (32.5% Dividends) |
| Additional Rate Band | 150,001+ | 45% (38.1% Dividends) |
As in recent years, higher earning individuals will continue to be hit by a personal allowance abatement for income more than £100,000. This will remain at £1 for every £2 earnt over this limit, and with the increased personal allowance, this means those with income of £125,000 and above will lose all their personal allowance. Income within this abatement bracket will be affected by a substantial effective 60% rate of tax, so if your personal income is on the up, now is the time to get serious.
Director Salaries
One of the most common forms of tax planning is implementing a tax efficient director’s salary. This amount has slowly increased in recent years, from around £680 – £700. Due to increases in National Insurance thresholds, the new optimal amount of director salary is £719 per month.
This amount will most effectively utilise your own personal allowance, whilst providing qualifying earnings for the full state pension and being a tax-deductible expense for your trading company. In addition, as the magic £719 amount falls below the primary threshold for National Insurance Contributions, no tax deducted! Bonus!
Dividends or Salary?
For company directors, in most circumstances after the director salary detailed above has been paid, it is more tax efficient to then draw dividends as opposed to additional salary. Dividends attract a much lower initial rate of tax compared with a more traditional salary and provide greater flexibility in the amount and timing of drawings.
Of course, everyone’s circumstances are individual, and whilst the above guidance should satisfy most usual income positions, tax planning is not one size fits all. We always recommend discussing your needs and goals with your dedicated accountant who is best placed to advise on a plan that suits your situation.
If you are looking at ways to structure your personal income in the most tax efficient manner possible, get in touch on 01872 300232 or email hello@hivebusiness.co.uk and one of our expert advisors will be able to put a plan into motion that works for you.
