The old tax year is still with us, but it is not too soon to start thinking about income tax planning in the coming year. This is a year of profound change after a prolonged settled period in the income tax planning arena.
The introduction of a dividend tax means that so called traditional tax planning needs to be addressed to consider whether it is still the optimum structure. For some it may well still be the ideal, but for others there may be opportunities to extract funds in more tax efficient ways.
One area particularly worthy of attention is interest income because, not only do we have a 0% band on the first £5,000 of interest income, but there is also going to be a personal savings allowance from 6th April 2016 which will take a further £1,000 of interest income out of tax in certain circumstances.
The rules relating to what income falls within what band are complex, so tax planning advice will be needed to take full advantage of this opportunity.
Not everyone will be able to generate interest income of course, but some will already have a loan advanced to their company on which no interest is being charged and others might be able to engineer a position where a loan is brought into existence. If so, then an agreement could be drawn up with the company for interest to be charged at or below a commercial rate.
What is a commercial rate is a question that would need to be answered on a case by case basis, but suffice to say that it would be well in excess of the current bank base rate of 0.5%.
Provided an individual’s income profile can be structured in the optimum way, this planning could save £1,200 of tax per year – up to double this if a spouse’s tax bands and allowances can be utilised as well.
This tax plan could be used to mitigate to some extent against the introduction of the dividend tax. It might also be used in conjunction with pension planning to gain further tax efficiency gains.
We are also holding a seminar in May at our Coventry office on Investment Strategy in a Low Interest Rate Environment – if you would like more information or to book your place please contact [email protected]