On 6 April 2016, new tax allowances were introduced meaning you now have to get to grips with not just the personal allowance, but a savings and a dividend allowance too. The last two aren’t really allowances at all but 0% rate bands, which have a specific place in a tax calculation. The personal allowance, on the other hand, can be allocated anywhere you want. Naturally, you’ll want to apply it in the way which will reduce your tax bill by the greatest amount.
The new allowances mean that tax liability can now be a flexible figure. This has caused so much trouble that even HMRC’s software can’t guarantee getting the calculation right.
So it’s now vital to review your tax return and sources of income closely with your accountant. There are a number of ways you could now reduce your tax bill by simply “working smarter”.
Allocating your personal allowance
You can choose how to allocate your personal ‘tax-free’ allowance against your income. So if you have income from salary, dividends, business profits and dividends, it is advisable to look at how much of your personal allowance gets allocated against each income source. Depending on the level of each income source, there could be significant tax savings to be achieved.
For example, there are nil rate tax bands for savings income and dividend income. So if you opt to use an amount of personal allowance against salary or business profits so that these ‘nil’ rate bands are fully utilized, you will save money on your tax bill! But if you have very high dividend income, it might be best to allocate some personal allowance against your dividends, depending on the level of other income you have.
TIP – talk to your accountant to ensure you’re getting the best tax relief available.
Joint income streams
Don’t forget the old classic tax saving strategy of making use of your spouse’s tax allowances too. It may be possible to allocate savings into his/her name, or bring him/her into the business as a partner to share the profits, or allow him/her to become a director and shareholder in your limited company.
TIP – there are specific rules around how income can or should be allocated to your spouse, so again talk to your accountant to make sure you’re getting this right before proceeding.