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Tax planning in March for owner managed and family run businesses

March is a key month for Tax Planning. Successfully conducted, Planning owner managed and family businesses can easily save thousands of pounds in unnecessarily high taxes.

Businesses such as these will typically be structured to pay out a mix of salary and dividends based on services provided and, the allocation of shares to the owner/manager and his or her family.

The aim for March will be to assess what level of dividends to pay before 5 April, and to assess the allocation of dividends between shareholders in order to ensure that no individual shareholder inadvertently gets taxed at higher rates than necessary.

To do this you will need to have a clear idea of the Income tax earnings for each shareholder and workout how much space they have in each of their tax bands, be it 20%, 40%, 45%, or 60%*¹

You then need to apply the constraining factors of profits available for distribution, cash available to pay the dividend, and the relative proportions of shares between shareholders. However, the latter can be mitigated by using a dividend waiver or validly issuing different classes of shares to each family member *².

One of the key driving factors for this process to work is that dividends are paid after the deduction of Corporation Tax at 20% and, because dividends are charged at a lower rate of tax than the combined alternative of Income tax and NIC.

However, during the March 2021 Budget, the Chancellor announced that Corporation tax would rise to 25% which will further erode the difference between earnings through dividends and PAYE.

Nevertheless, it will still pay to ensure that you plan your tax each March to obtain the residual benefit plus the significant gains to be achieved by being taxed at lower rather than higher tax rates.

At A Star Accounting Services, we will help you achieve the maximum benefit and also offer you free basic Xero accounting software to help you stay on top of your information flows and the business intelligence that this provides.

Call us for a free chat and discover how we can help you and your business achieve more for less hassle.

Accountably yours.

Wisdom

Notes

*¹ – Yes, there really is a 60% tax band which exists between £100,000 and £125,000 (2020/21) and is created as your personal allowance to be reduced by £1 for every £2 of earnings up to £125,000 in 2020/21, being 2 x Personal allowance of £12,500

*² – Please ensure that appropriate minutes of the board of directors are prepared before 5 April and that attachments include calculations, validly produced and signed waivers and justifications. This is both good practice and valid evidence to produce if required to by HMRC.