Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

Year End Marginal Tax Rate Planning

Newsletter issue - March 08.

When you run your own company you have a certain amount of control over how much income you are personally taxed on in each tax year. The company is taxed on the profits it makes in each accounting year, but you don't have to draw those profits out in the same period. You probably take a basic salary from your own company and top-up your income needs with a bonus or a series of dividends.

Just before the end of the tax year is a good time to assess how much you have taken out of the company, and what your total taxable income will be for 2007/08. The threshold at which higher rate tax kicks in is £34,600, so assuming you are aged under 65 and have a personal allowance of £5,225, you can receive gross income of £39,825 in 2007/08 before you start paying tax at 40%.

To work out your gross income you need to 'gross-up' the dividends you receive from your company. Each dividend voucher should show the gross and net amount, but in case you have mislaid those vouchers, £1,000 of net dividend is equivalent to £1,111 gross. Your payslips should show the gross pay you have received and all the tax and NI deducted. You also need to take into account the value of any benefits in kind and interest you have received in this tax year. Interest from bank accounts is normally paid net of 20% tax, so for each £100 net you receive the gross equivalent is £125. Tot up all your different sources of gross income and benefits for the year, to see how much headroom you have before reaching the higher rate tax threshold of £39,825.

If you are about to exceed the 40% threshold, you could postpone issuing that next dividend so it falls after 5 April 2008 and in a new tax year. If you need the cash you could arrange for your own company to lend you up to £5,000 until after 5 April 2008, when it can be repaid with the issue of a dividend or bonus. As long as the total amount you borrow from the company at any one time is less than £5000, and you repay the amount borrowed within nine months of the company's year end, there should be no tax implications.

On the other hand if you have a good deal of headroom before hitting the 40% threshold, and the company has the available cash, it makes sense to withdraw dividends up to that threshold. If you don't need the income straight away you can invest it in your own name or lend it back to your company.

  • Auto enrolment icon

    Auto Enrolment

    Workplace pensions rules are changing.
    Be prepared for auto enrolment, see how we
    can help and read up on our guidance notes.

    More

  • Cloud accounting icon

    Cloud Accounting

    With our online bookkeeping packages, our support
    services are only a click away.
    Discover cloud accountancy solutions to bring your finances up to date.
    More

  • Pay less tax icon

    Pay Less Tax

    Our experienced tax advisors can help you
    make the most of your options to reduce
    your tax bills.

    More

  • Make more profit icon

    Make More Profit

    From business plans to management accounts,
    our business services will ensure you are in
    control of your business finances.

    More

  • Source finance icon

    Source Finance

    Our experienced partners can guide you
    in getting the finance you need to make
    your business grow. Read our guides or
    contact us for a free consultation.
    More

  • Outsource your payroll icon

    Outsource Your Payroll

    Let us handle payroll compliance for your
    business. We can deal with HMRC on your
    behalf, and take the stress out of RTI.

    More