The 2012/13 tax year starts on 6th April Do you want to stay tax and NI efficient?

For the 2012/13 tax year, basic tax free allowances have increased from £7,475 to £8,105.    However, the point at which higher rate tax will apply drops from £35,000 to £34,370.If you are a director, and aim to extract profit from your company in the most tax efficient way you may need to tweak your salary to make the most of the new rates.

The National Insurance threshold for 2012/13 will mean that you won’t pay NI where your salary and bonuses for the year don’t exceed £7,590.  However, your company’s NI starts at £7,485, so from 6th April it is this lower salary figure that’s paramount.

At this salary level neither you nor your company will pay NI, but you will still receive a full year’s NI credit to your state pension record.

As a salary of £7,485 won’t pay for the finer things in life, the idea is to top this up with income that doesn’t count for NI purposes.  This means dividends, although some benefits-in-kind also may apply.  The idea is therefore to pay yourself regular dividends, say monthly, at the most tax efficient level. Obviously this will depend on the tax free allowances and rate bands that are available to you.

For the tax year 2012/13 the most tax efficient combination of salary and dividends remains unchanged from the current year at £42,475, i.e. salary of £7,485, and dividends of £34,990.

Also where you have other tax deductible allowances or reliefs, for example those given for personal pension contributions or Gift Aid payments, you can increase the amount of dividends the company pays you and yet remain tax efficient.

Please note that dividends can only be paid from company profits, so if your company doesn’t have profits to distribute, then the scenario of low salary and high dividend payments cannot be used.  In this situation a different plan will be needed.

Now is the time to review your dividend strategy you can contact us for advice on 0161 832 4451.