New Year End Planning Strategies
MoneyWise Autumn 2006
New Year’s Eve is the most popular single date for companies to set their year end. With a 31 December year end, the accounting business year and the calendar year conveniently coincide. Well before Sunday 31 December 2006 you should have executed your year end corporate planning. Ideally you should be thinking about the year end tactics now, before the assorted distractions of December and Christmas start to appear.
This year your options have changed yet again. The main rules and rates for income tax are basically the same, but corporation tax has been slightly altered. In the March Budget, the Chancellor scrapped the £10,000 nil rate corporation tax band together with the associated complex non-corporate distribution rules. This move only affected companies with gross profits of less than £50,000.
Assuming your profits exceed that level, the choice between whether to draw a bonus or dividend works out in the same way as last year, as shown in the table. Dividends may remain the better route if your company is in the 19% corporation tax band.
The major change for this year has occurred on the pension front, thanks to the arrival of pension simplification in April. In theory, in 2006/07 you and your employer(s) can normally obtain tax relief on contributions up to a total of £215,000 to your pension arrangements, regardless of your earnings.
The employer contribution must be justifiable as a business expense, so in practice, a very large employer contribution might possibly not gain full tax relief. Nevertheless, in nearly all situations there is now greater scope than in 2005 to divert profits to your pension plan.
It is not only the contribution potential that is higher, but your pension choice is wider too. For example, even if you are a member of an executive pension plan or small self-administered scheme, your company can now contribute to a personal pension on your behalf.
So, before 2007 arrives, your company could fund a self-invested personal pension completely separate from the business, where you can make all the investment decisions. The new pension options are well worth exploring, but do make sure you leave enough time to investigate fully.
| Bonus or Dividend | ||
| Bonus | Dividend | |
| £ | £ | |
| Marginal gross profit | 50,000 | 50,000 |
| Corporation tax | N/A | (9,500) |
| Dividend | N/A | 40,500 |
| Employer’s National Insurance Contributions (NICs) £44,326 @ 12.8% | 5,674 | N/A |
| Gross bonus | 44,326 | N/A |
| Director’s NICs £44,326 @ 1% | (443) | N/A |
| Income tax | (17,730) | (10,125) |
| Net income to director | 26,153 | 30,375 |
Assumptions (a) Company's marginal corporation tax rate is 19% (b) Director's marginal income tax rate is 40% (32.5% for dividends) and (c) All bonus or dividend assessed at 40% or 32.5% respectively.
