Newsletter Summer 2016

Slicing and dicing your income

Your income tax bill is now determined by a complex network of allowances, tax rates and tax bands, which interact in unexpected ways. There are different tax rates for savings, dividends, and for all other income. Certain allowances apply or disappear as your total income crosses particular thresholds.

The result is a mess, and we take no pleasure in saying it is now virtually impossible to predict your personal tax position using only a pencil and paper. However, such complexity can be used to your advantage if you have control over your own income.

Company owners can determine how much income they draw out of their own company, and the form that income takes: salary, dividend, interest, pension contribution, etc. As all those categories of income are subject to different rates of tax and National Insurance Contributions (NIC), it is possible to plan your income mix to minimise your total tax bill and to fit your personal income needs.

If there are two or more family members involved in the business the possibilities to save tax are magnified. For example, a larger slice of income may be covered by available allowances or fall into the lower tax bands. Unincorporated businesses such as partnerships can be used to share income around a family in a more flexible manner than a company.

To achieve the most favourable tax position it is necessary to look ahead and plan when income will arise, and in whose hands. If this is of interest to you, we should talk. Sensible income and tax planning is no longer a back-of-the envelope task – it requires some deep thought and a cool head.