Keeping your tax liabilities to a legal minimum
Sadly there are no legal magic tax solutions. There are some people that pay less tax on what they earn than others though and critical to a good tax planning strategy is ensuring that as little tax as possible is taken from profits that are on their way from company to individual.
Most owner-managed businesses pay more in dividends than directors' salaries. This is because National Insurance applies to the salary but not to dividends. This can have an adverse effect on the maximum amount that can be paid into a pension though conventional wisdom has it that the salary should be increased in order to make the required contributions but the extra tax payable on the salary outweighs the tax saved on the pension contribution.
So what are the alternatives? Firstly, pay at least £3,600 into a personal pension. This amount can be contributed whatever your earned income (even if it is zero). Secondly, look for a year in the last six when your earned income was high, such as a time when you were self-employed or had high benefits in kind. This year can be used quite legitimately as a base year for contributions in the next five years. Other alternatives include contributing to an ISA as a way of saving for retirement. Tax relief is not available on contributions in but no tax will be payable when the funds are taken back out. Importantly, the taxpayer will not have to increase his or her salary in order to invest in an ISA.
Whatever your circumstances it is crucial that your financial adviser
and accountant do not work in isolation to each other. Understanding
the overall effect on your affairs is the key to keeping your tax liabilities
to a legal minimum.
