Starting Rate Tax Band
In the current fiscal year to 5 April 2018 we each have a Starting Rate tax band where up to £5,000 per annum in savings income can be received tax free.
This starting rate tax band is only available to be used against savings income where the individual’s non taxable savings income is less than £5000. This is more than the personal allowance which is currently £11,500.
What does this mean?
- For many owner managed businesses where the route of low salary, high dividend as a means of extracting income has been taken this can present a real opportunity in certain circumstances. The optimum salary for many company owners is now around £8,000 per annum. A level well below the limit highlighted above. Dividends are not classed as non savings income and therefore do not cause a problem when looking at the thresholds.
- If the Director has made a loan to the company (or can create one which helps for business funding) then interest of up to 8% can be charged on any credit balances.
- This interest creates a charge in the company’s profits. This can be used to reduce the company’s Corporation tax charge and a receipt in the hands of the Director that can be tax free up to a maximum of £5,000 per annum.
- As part of careful remuneration planning this can also be used to help reduce the amount of dividend being drawn by the Director and arrive at an income level that is much more effectively taxed than was previously the case.
- There is some administration to attend to. For example, the company needs to deduct basic rate tax on the interest payments and pay this over to HMRC using form CT61. This is reclaimed by the Director when completing their personal tax return.
This is an area that requires careful thought, planning and effective implementation. For many owner managers running a low salary/dividend income extraction route means there is great potential to take advantage of an often over looked tax relief.
