Latest tax planning news and tips
This month Michael Lansdell, from Lansdell & Rose Chartered Accountants, talks this month about if you should increase your director’s salary in 16/17.
The views expressed in this article are specifically those of Lansdell & Rose Accountants.
Salary versus dividends – the most tax efficient mix
Effective tax planning helps you keep more money in your pocket to spend on things you enjoy, or to save for your future. Each year it is important to reassess everything related to your tax, so you can continue to move to a more profitable financial position. At this time of year, I get asked a lot from my clients about if they should increase their director’s salary.
Here I explain…
The most tax efficient way for a doctor or dentist to draw money from a limited company is to take dividends. Even despite the shake-up to the dividend tax system from April 2016, dividends remains more tax efficient than drawing a salary, where PAYE income tax, plus, National Insurance (NI), are deductible.
To this effect, the director’s salary should be kept at the lowest level possible to avoid paying PAYE and NI, and the rest of the required drawings should be taken as dividends.
Often the limits that trigger Income Tax and NI change, so the director’s salary can increase accordingly from year-to-year, in line with new limits.
Increase in the tax-free allowance for 16/17
The personal allowance refers to the amount of income that can be earned free of tax.
For 16/17 there has been an increase in the personal allowance from £10,600 to £11,000, which means the limit that triggers Income Tax has increased.
Effectively, £400 more can be earned in the year from 6 April 2016 to 5 April 2017 with zero tax implications.
However, despite this increase, it is in fact the NI limit that determines the most tax-efficient annual salary for a director, as this falls at a lower threshold than that of tax.
The NI limit remained the same for 16/17
In 16/17, the NI limit remained the same as the prior year, which is why, at Lansdell & Rose we are suggesting to our clients that they do not increase their director’s salary for the current tax year.
“Many doctors and dentists have called me since April, asking if they should increase their salary this year. I explain the reasons why the answer is no for this tax year.” Mark Ibbotson, Client Services Director, Lansdell & Rose.
Tax planning is vital
With the salary recommendation remaining the same, and the changes to way dividends are taxed incurring more tax for you, tax planning for doctors and dentists is essential to ensure you are saving the most tax possible.
Tax planning strategies for doctors and dentists include:
- Ensuring all deductible business expenses have been claimed
- Ensuring all deductible personal expenses have been claimed
- Utilising all available tax allowances
- Personal pension planning – to extend the amount of income that can be earned at basic rate
- Salary sacrifice – enabling some of your remuneration to be taken in non-cash form, reducing dividends
Read more from Michael
- How the new dividend rules affect you
- Important dates and rates for the new tax year
- Commercial property is proving a win:win
- Inheritance tax update