We’re fast approaching the end of the tax year on the 5th of April, and now is usually a good time to understand 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.
Make sure that you take any company dividends before the 5th of April 2021. These need to be issued by your company before the end of the tax year on the 5th of April 2021 to be included in your personal self-assessment with HMRC for the 2020/21 tax year. This will help your tax-efficiency by fully utilising your personal tax-free allowance and HMRC tax thresholds.
How much can you take in tax-free dividends?
Tax on dividends is paid at a rate set by HMRC on all dividend payments received. Anyone with dividend income will receive £2,000 tax-free, no matter what non-dividend income they have.
Are your records up-to-date?
Before reaching the end of the tax year and issuing your dividends, it is important to make sure that your accounts are up-to-date. Your business bank account should be reconciled and your company accounts should be up-to-date with all expenses, pension contributions, salaries, and sales invoices recorded. If all of this information is up-to-date then you will be able to make an accurate assessment of your company profits and any tax due. It is much easier to then calculate the dividend you can pay yourself and any other shareholders. All dividends must be paid from available company profits. Be careful not to take more than is allowed, as you could face penalties and interest as it is treated as a Director Loan.
Payroll and Pension Contributions
If you are running a payroll then you will need to file your final Full Payment Submission (FPS). You should also record a payroll run for March 2021 to maximise your tax-efficient salary paying yourself up to the NI Primary threshold for the 2020/21 tax year. This would also be the time to check the amount of salary you have been paid in the tax year to date (since 6th April 2020).
If you want to make pension contributions this year, you need to make sure these payments are received by your pension provider by the 5th of April 2021. If you run a limited company then making payments through your limited company is usually more tax-efficient. You can also pay into your pension through your monthly payroll or make lump sum contributions periodically throughout the year.
The total amount that can be contributed for tax relief purposes is £40,000 per year or your Net Relevant Earnings, whichever is lower. This could be lowered if your earnings exceed the threshold allowance of £200,000 or you have accessed benefits from your pension.
The government provides tax relief at the basic rate of 20% and this is added to your contributions by your pension provider. If you are a higher rate taxpayer, you can claim further tax relief through your annual self-assessment return. If you ’re a higher rate taxpayer, and you make contributions personally, your pension pot can be topped up by £1,000 and it would cost you £600 after tax relief. As a basic rate taxpayer, your pension pot can be topped by £1,000 and it costs you £800.
Don’t forget your 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. We can provide you with advice in this area of investments, so please get in touch.
If you would like to speak to us to discuss how you can prepare for the end of the tax year, then please get in touch and one of our advisors will be able to assist you.
* The Financial Conduct Authority does not regulate Tax Advice. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.