1. Dividends – The Annual Dividend Allowance (£5,000 Tax-Free)
The current personal tax-free dividend allowance is £5,000. If you have not drawn this much from your business then at the very minimum you should consider distributing this amount out to each shareholder.
If for cash-flow reasons, your business cannot afford to have £5,000 withdrawn per shareholder, then you can always pay out a dividend and then redeposit it back into the business as a director’s loan.
This way you will have crystallized the tax-free allowance from this tax year and will be able to draw the money back again, tax-free, at a future date whenever your cash-flow allows it.
Please note, dividends can only be paid out if your business has profits that it can distribute.
2. Dividends – The Basic Rate Band Allowance
The basic rate band of tax is the segment of your income where dividends are taxed at 7.5% (and employment income is taxed at 20%).
This band currently stretches from the end of your personal allowance (assuming yours is not tapered or stretched, this is currently £11,500) to the next £33,500 of income. This usually means that your income between £11,500 and £33,500 will be taxed at the basic rate.
Please note that the £5,000 dividend allowance counts towards total income, so for these purposes, your basic rate should actually be reduced by £5,000 to £28,500.
Since this band is taxed at the lowest rates, it is usually advisable to utilize as much of this as possible each year.
Please note, as mentioned in the section above, if you are incurring taxable income then you will need to register for self-assessment and file a personal tax return, at the very latest, by 31st January.
If you need to register for self-assessment or would like to engage us to file your personal tax return then book an appointment with us today.
Calculating your remaining basic allowance
If you are employed elsewhere and want to calculate your remaining basic allowance, then you can use the following basic formula:
Remaining Basic Allowance = £33,500 – (Gross income from employment) – (dividends already paid in this tax year)
You should be able to find your gross employment income from your month 12 payslip, or by adding your monthly salary to the month 11 payslip (assuming your P60 hasn’t been issued yet).
Please note, this formula has been given to give people a general idea of how to make the calculation. Things can get slightly more complex if you have any other income to include, such as rental income, investment income, or capital gains.
3. Capital Gains – Annual Exemption Allowance (£11.3K Tax-Free)
The capital gains allowance for the year is currently £11,300, meaning that you can make a gain of up to this amount, tax-free.
If you own shares or any other capital assets, then you may want to consider making a disposal to crystallize any gains up to this value without triggering this tax.
Please note that in order to prevent “bed and breakfasting” you cannot repurchase these shares within 30 days without potentially losing some of the tax-free exemption.
4. Pension Contributions
Tax relief is available on contributions up to 100% of relevant UK earnings or £3,600 if greater, subject to the annual allowance.
The annual allowance for pension contributions is £40,000 (for those earning less than £150,000).
If you do not currently contribute to a scheme
Even if you do not currently contribute to a pension scheme, you may want to consider opening one and making a nominal contribution before the end of the tax year.
The reason for this is that it is possible to bring forward unused annual Pension allowances for up to three years, but only if you had a scheme open.
So although you may not be actively contributing now, it means that in three years time, or when you are looking at making significant contributions, then you will be able to potentially use up to three years’ allowances rather than one.