HMRC

Why does the tax year end on 5 April?

Are you ready for a history lesson?

Well, the short answer to “why does the tax year end on 5 April?” is that three things conspired to act together:

• In the old days, agriculture was the dominant business in Great Britain and “the year” revolved around sowing, tending, harvesting and preserving.
• So, traditionally (and until 1752) the tax year in Great Britain started on 26 March (the old “New Year’s Day”) and ended on 25 March.
• Then along came Pope Gregory XIII who for pragmatic reasons, wanted to score a point off Julius Caesar.

Perfectly clear, no? Pope Gregory did stuff in 1582 and it took Great Britain until 1752 to catch on. Let’s have a look at the long answer!

In the really old, old days, few people travelled far from home and calendars and clocks were not particularly important, the natural rhythm of life was tied to the natural rhythm of the seasons, and the variable amounts of daylight. Unless of course you were a Roman soldier! Building massive empires needs some coordination after all!

The Roman Civic calendar had been in place for as long as anybody could care to remember, and it’s origins were pretty obscure anyway. It was also inaccurate. By about 48 BC Caesar and his wise nobles were becoming increasingly troubled by the fact that the solar year and the Roman Civic calendar were becoming increasingly out of step. According to the astronomer Sosigenes it was three months out of step to be precise! They worked out that the solar year was 365 ¼ days long and they created the new Julian calendar, introducing the leap day for the first time. It wasn’t on 29 February though. It was decreed that every four years there will be two consecutive days called 23 February. Naturally!

Problem solved!

But it wasn’t!

To get things back into line, Caesar arranged for the year 46 BC to have 445 days! And because calendars and clocks were not particularly important to anybody but the military, it wasn’t until the year 8 BC that the new Julian calendar was widely adopted across the Roman Empire. The problem though, was that Sosigenes had overestimated the length of the solar year by 11 minutes and 14 seconds.

Then along came Pope Gregory and his nobles in the 1500s, and they spotted that this wonderful new Julian calendar was out of step with the solar year by about 10 days! A perfect excuse to put things right and to get your name in the headlines for ever more. The Gregorian calendar was established in 1582 when 4 October was immediately followed by 15 October.

Except that some parts of Europe (and beyond) were not prepared to take orders from a Catholic Pope, and so the Protestant and Orthodox countries (and others) did not follow suit. Even to this day, the dates of Easter vary between countries, according to their religious preference for the Julian calendar, the modified Julian calendar, or the Gregorian calendar! What a harmonious planet we live on!

In 1582 Austria, Spain, Portugal, Italy, Poland, and the Catholic states in Germany ended up out of step with the rest of Europe by 10 days. Gradually other countries came into line (because the astronomers were right, not because the Pope was right) and Great Britain made the switch a mere 170 years late, in 1752.

Turkey became the last European country to officially switch to the new Gregorian calendar, on 1 January 1927. Just 345 years after Italy did it.

Now go to present day Ethiopia and see how they have a 13 month calendar and a 12 hour day! One hour of Ethiopian time is not the same as one hour of Western time. One hour of Ethiopian time today is not even the same as one hour of Ethiopian time yesterday. The day starts at dawn and ends at dusk, and regardless of its length the day is split into 12 equal hours. They call new year’s day Enkutatash and it happens on either 11 or 12 September (on the Gregorian calendar).

But enough of this banter! You haven’t answered the question! Why does the tax year end on 5 April?

Well you were warned, it’s a long answer!

In Britain The Calendar (New Style) Act 1750 brought things into line with most of Europe, and that meant that 1752 was going to be a short year. Wednesday 2 September 1752 was followed immediately by Thursday 14 September 1752.

The problem was the uproar at The Exchequer, because they wanted a full year’s worth of tax to play with. And that’s when the end of the tax year moved from 25 March to 4 April. The Exchequer had a full 365 days’ worth of tax.

And that kept them happy until 1800.

Even though 1800 should have been a leap year, the Gregorian calendar decreed that 1800 was not a leap year owing to Sosigenes and his 11 minutes and 14 seconds miscalculation. Clawing back one day from 1800 compensated for centuries of getting pesky Julian calendar interference stuck in the magnificent Gregorian calendar precision.

But oh no! British civil servants being British civil servants were not standing for that! Losing one day of tax revenue! Hence, the end of the tax year was moved again, from 4 April to 5 April.

And there you have it, that is why the tax year ends on 5 April.

Practically every other country in the world has adopted the calendar year as their tax year. Even Ireland did that, in spite of the legacy 5 April date which the newly formed Republic of Ireland had inherited from the British system.

Why won’t Britain adopt a calendar year based tax year? You guessed it! British civil servants being British civil servants won’t stand for that!

How does the tax year affect you?

Limited companies

For limited companies, the financial year runs from 1st April one year to 31st March the following year. This is the date that the government typically sets new tax rates and rules to start on – for example, a new corporation tax rate may begin on 1st April in any given year.

The accounting year end is the date that a limited company chooses to prepare its accounts to every year. It runs from the day after the previous accounting year end to the next accounting year end. Many limited companies, but not all, choose 31st March for their accounting year end so that their accounting year matches the financial year.

The date you choose to begin your accounting year will affect when you pay tax on your profits, as companies pay tax nine months and a day after their accounting year end. For example, if you prepare your company’s accounts to 31st December each year, Corporation Tax will be due by 1st October.

Sole traders & partnerships

For sole traders, partnerships and individuals working for a company, the tax year, also known as the fiscal year, runs from 6 April one year to 5 April the following year.

Many sole traders, but not all, choose 5 April for their accounting year end so that their accounting year will match the tax year. By concession from HMRC, a sole trader who chooses 31 March for their accounting year end is also treated as having an accounting year that matches the tax year.

Director shareholder payments 2024/25

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2025. If your company is only one of your income sources, alongside significant investment income, or a PAYE salary elsewhere, then you will need a tailor made strategy.

Let’s assume that your company is your main income and the other sources are relatively trivial. Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit, then you can pay no dividend. Take care not to pay dividends out of investor funding, bank loans or your company tax reserve. Investor funding and bank loans are not “profit”. Your company tax reserve is not “distributable profit”.

When most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”. It must be a separately identifiable bank transaction, and should be paid at the end of every calendar month.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers	year ended 5 Apr 2025
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	41
Tertiary drawings (max) liable to 8.8% tax	3100

Provided always that the monthly income does not total more than	4188
Put aside 8.8% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40%	year ended 5 Apr 2025
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	41
Tertiary drawings liable to 8.8% tax	3100
Supplementary drawings (max) liable to 33.8% tax	4145

Provided always that the monthly income does not total more than	8333
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 125,140 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45%	year ended 5 Apr 2025
Monthly figures
Salary	0
Primary “Tax Free” drawings (personal allowance)	0
Secondary “Tax Free” drawings (dividend rate band)	41
Tertiary drawings liable to 8.8% tax	3100
Supplementary drawings (max) liable to 33.8% tax	5192

Additional drawings liable to 62.0% tax	excess over 8,333.00
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.
And put aside 62.0% of your additional drawings as a personal tax reserve, because the personal allowance is withdrawn and that artificially creates an effective rate of tax of more than 60%.

For an independent view of this strategy have a look at this Unbiased report.

Find out more about dividend vouchers on this web site.

Is this legal?

Yes.

Lord Tomlin stated in the case of IRC vs Duke of Westminster (1936) 19 TC 490 every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

Who wants to pay One Million in tax?

Imagine you have walked into some sort of business seminar, and the presenter starts with the question:

“Who wants to pay One Million in tax?”

And before anybody can reply, immediately answers the question by saying:

“I do!”

What’s going on?

Well, think about it. How much money would you need to earn in order to have a tax bill of one million? And if you were earning that much, do you think you would be troubled by your one million tax bill? Probably not. You’d probably be able to survive on the money that you have left over after the tax is paid. If not, you might in any case have sufficient drive to go out and earn some more money. So that (at some point) you’ll find yourself in the fortunate position of not having to worry about a scarcity of money in spite of your big tax bills.

That’s where you want to be. And how are you going to get there?

What you want to be doing is generating more sales and more profit. You’ll be wasting your time if your primary focus is on getting your tax bill down.

Instead, get your profit up, and face the fact that we all have to pay tax.

How will you increase your sales and your profits? You need a business plan. Here’s some revelationary early thinking on business plans, originally written in antiquated French by Henri Fayol, and translated into equally amusing old fashioned English by Constance Storrs. It’s worth a read both for the advice is gives, and for the way that it gives it.

Fayol recommends that you rewrite your plan annually. His advice still holds good today.

a generic picture of a Frenchman from the early 1900s

Compiling the annual plan is always a delicate operation and especially lengthy and laborious when done for the first time, but each repetition brings some simplification, and when the plan has become a habit, the toil and difficulties are largely reduced. Conversely the interest it offers increases. The attention demanded for executing the plan, the indispensable comparison between predicted and actual facts, the recognition of mistakes made, and successes attained, the search for means of repeating the one and avoiding the other, all go to make the new plan of work of increasing interest and increasing usefulness.

Also by doing this work, the personnel increases in usefulness from year to year, and at the end is considerably superior to what it was in the beginning. In truth, this is not due solely to the use of planning, but everything goes together. A well thought out plan is rarely found apart from sound, organisational, command, coordination, and control practices. This management element exerts an influence on all the rest.

Lack of sequence in activity and unwarranted changes of course are dangers constantly threatening businesses without a plan. The slightest contrary wind can turn from its course a boat which is unfitted to resist. When serious happenings occur, regrettable changes of course may be decided upon under the influence of profound but transitory disturbance. Only a program carefully pondered at an undisturbed time permits of maintaining a clear view of the future and of concentrating maximum possible intellectual ability and material resources upon the danger.

It is in these difficult moments above all that a plan is necessary. The best of plans cannot anticipate all unexpected occurrences which may arise, but it does include a place for these events and prepare the weapons which may be needed at the moment of being surprised. The plan protects the business not only against undesirable changes of course which may be produced by grave events, but also against those arising simply from changes on the part of higher authority. Also, it protects against deviations, imperceptible at first, which end by deflecting it from its objective.

The timid are tempted to suppress the plan or else whittle it down to nothing in order not to expose themselves to criticism, but it is a bad policy even from the point of view of self interest. Lack of plan, which comprises smooth running, also exposes the manager to infinitely graver charges than that of having to explain away imperfectly executed forecasts.

What does your business plan say? You don’t have a plan?

How does not having a plan help you?

If your focus is on tax reduction, then you’re trying to make the tail wag the dog. The General Anti-Abuse Rule (the GAAR) was introduced more than 10 years ago to counter anything which is not based on sound business principles. Whatever clever wheeze you’re thinking of won’t work. Sound business principles do work.

Artificially manipulating things to get your tax bill down will fall foul of s.207(1) & (2) Finance Act 2013. And the penalties under the GAAR can be as much as 60% of the missing tax, on top of paying the missing tax itself. If you’re a 40% taxpayer that’s like asking to pay 64% instead. For example:

tax on hidden income	100	x	40%	=	40.00
penalty on missing tax	40	x	60%	=	24.00
total					64.00

So, rather than waste time on measures to antagonise the tax man, please spend some time on something which will really make a difference. Would you like to have enough income to not worry about paying tax of one million?

Do not be on fire

Do not be on fire, AKA “getting to grip with things”.

Have you ever cooked anything on a camp fire? And have you ever cooked anything in a microwave oven? They’re basically the same thing, but they do the same thing very differently, and they require vastly different levels of care, skill and maintenance. The microwave oven does the challenging stuff for you. However, handle a camp fire badly and you are going to get burnt, and possibly burn others too. The camp fire also takes time and effort to set up correctly, and to decommission safely.

That’s a useful analogy for what it takes to be a company director, compared to being a regular employee. If you do not comply with the directors’ duties in the Companies Act then (metaphorically) you are going to get burnt. Whereas an employee might only risk a (metaphorical) slap on the wrists.

At Proactive, when we’ve worked with new clients for a number of months, we sometimes have to remind them of their duties and obligations. The email can vary in severity, and it usually starts like this:

“I would be failing in my duty as an accountant if I didn’t tell you this now. And, it’s better that you hear it from me now, rather than hear it from HMRC after a few more years of doing the same thing. Nobody wants to end up in court arguing with HMRC or a supplier or a business partner.”

The middle of the email is tailor made to explain some of the concerns we have as professional accountants. It’s factual, it’s not emotional. And it stresses that we ourselves are company directors who comply with the directors’ duties. Hence, we are complying by telling errant directors that they also need to comply.

Usually this “get a grip” email ends with the standard dialogue below, though it sometimes changes depending on the circumstances:

“Your first duty is to act in the best interests of the company and for the benefit of its stakeholders as a whole. The company bank account is not your personal piggy bank. You and your company are not the same thing. I recommend that you read about directors’ duties in sections 170 – 177 of The Companies Act 2006

http://www.legislation.gov.uk/ukpga/2006/46/contents

Please look closely at s172.1(c) and 172.1(e).

Where s.173 says “independent judgment” it means that you need to step away from the business and look at it from the outside as an independent observer. As this mythical independent observer, do you think that the interaction between the company (one legal entity) and the director (a separate legal entity) all comply with s.172.1(e) where is says “maintain a reputation for high standards of business conduct”?

Take the weekend to think this all through, it’s time to get a grip on being a business director, and then let me know what would be a good next step.”

So if you’re leaving the world of employment to work as a contractor through your own limited company, it’s not as straight forward as operating a microwave oven. It’s more like cooking on a camp fire. It’s not a walk in the park, it’s a fire, and you are legally required to get a grip!

Engineers and software developers will know about rule zero . . .

A poster from HackSpace Nottingham which looks like a traffic sign. A person is running away from a fire, the border has a large red circle, with a large red diagonal line. Beneath the circle, in big bold capitals it says DO NOT BE ON FIRE. The poster is edged with black and yellow tape, commonly used to fence off danger.

Rule 0 – Do not be on fire!

Director shareholder payments 2023/24

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2024. If your company is only one of your income sources, alongside significant investment income, or a PAYE salary elsewhere, then you will need a tailor made strategy.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers	year ended 5 Apr 2024
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	83
Tertiary drawings (max) liable to 8.8% tax	3058

Provided always that the monthly income does not total more than	4188
Put aside 8.8% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40%	year ended 5 Apr 2024
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	83
Tertiary drawings liable to 8.8% tax	3058
Supplementary drawings (max) liable to 33.8% tax	4145

Provided always that the monthly income does not total more than	8333
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 125,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45%	year ended 5 Apr 2024
Monthly figures
Salary	0
Primary “Tax Free” drawings (personal allowance)	0
Secondary “Tax Free” drawings (dividend rate band)	83
Tertiary drawings liable to 8.8% tax	3058
Supplementary drawings (max) liable to 33.8% tax	5192

Additional drawings liable to 62.0% tax	excess over 8,333.00
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.
And put aside 62.0% of your additional drawings as a personal tax reserve, because the personal allowance is withdrawn and that artificially creates an effective rate of tax of more than 60%.

For an independent view of this strategy have a look at this Unbiased report.

Find out more about dividend vouchers on this web site.

Is this legal?

Yes.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

Director shareholder payments 2022/23

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2023. If your company is only one of your income sources, alongside significant investment income, or a PAYE salary elsewhere, then you will need a tailor made strategy.

If you have no profit, then you can pay no dividend. Take care not to pay dividends out of investor funding or out of bank loans. Investor funding and bank loans are not “profit”.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers	year ended 5 Apr 2023
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings (max) liable to 8.75% tax	2975

Provided always that the monthly income does not total more than	4188
Put aside 8.75% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40%	year ended 5 Apr 2023
Monthly figures
Salary	758
Primary “Tax Free” drawings (personal allowance)	289
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings liable to 8.75% tax	2975
Supplementary drawings (max) liable to 33.75% tax	4145

Provided always that the monthly income does not total more than	8333
Put aside 8.75% of your tertiary drawings as a personal tax reserve.
Also put aside 33.75% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45%	year ended 5 Apr 2023
Monthly figures
Salary	0
Primary “Tax Free” drawings (personal allowance)	0
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings liable to 8.75% tax	2975
Supplementary drawings liable to 33.75% tax	5192

Additional drawings liable to 39.35% tax	excess over 8,333.00
Put aside 8.75% of your tertiary drawings as a personal tax reserve.
Also put aside 33.75% of your supplementary drawings as a personal tax reserve.
And put aside 39.35% of your additional drawings as a personal tax reserve.

For an independent view of this strategy have a look at this Unbiased report.

Find out more about dividend vouchers on this web site.

Is this legal?

Yes.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

Company Tax and Personal Tax

A simplified worked example

It’s important to be clear about what is company money and a company tax liability, and what is personal money and a personal tax liability. Let’s consider a simple example. To make the numbers easier to follow, we’ll also assume that corporation tax is 20% and that personal income tax is charged at 33% on dividends and 40% on salary. That’s close to the real situation for people who already have a mainstream job, and are also running a freelance business through their own limited company.

stacks and stacks of various new bank notes, batched into wads the way the bank does it

Do remember, that you and your company are separate legal entities. Each has its own assets and liabilities (money in the bank, and tax bills) and that it can often be the case that your company owes you money, or you owe your company money. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Dividend method

Mr Klavier is a music teacher at a good school with a good salary. He is already a higher rate tax payer even without having a business on the side. His business “The Piano Man Ltd” is a company, and it provides private tuition on a one to one basis in the evenings and weekends. All the fees go into the business bank account, and the company makes about £10,000 per year. The costs are negligible and so we can make a reasonable assumption that the company profit is £10,000 or as near as makes no difference. The company tax position looks like this:

Annual profit	10,000
Corporation tax at 20%	(2,000)
Distributable profit	8,000

Every year “The Piano Man Ltd” makes a profit of 10,000 and pays corporation tax of 2,000. If Mr Klavier does nothing else, then his company value increases by 8,000 every year until he shuts it down. The money stays in the company bank account. That way, the tax rate is effectively 20% all of the time, and there is likely to be a capital gains tax bill right at the end when the company is dissolved. Compared to income tax, capital gains tax is a cheap tax.

However, at the discretion of the directors (Mr Klavier is the sole director and the sole shareholder) a decision can be made to pay out some (or all) of the distributable profit as a dividend. A dividend is a reward to the shareholders for the original investment they made into the company. Normally, dividends are declared on a quarterly or annual basis. See the introduction to dividend vouchers for more detail.

This year, Mr Klavier decides to take all 8,000 of the distributable profit as a dividend. The 8,000 is transferred from the business bank account of The Piano Man Ltd to the personal bank account of Mr Klavier. As long as the company has enough money left to pay its own corporation tax bill, that’s OK. In real life you wouldn’t want to cut it that fine!

Knowing that he is a higher rate taxpayer, Mr Klavier needs to set aside something for personal income tax. Knowing that the dividend tax rate is 33%, he puts 2,667 of the 8,000 into a personal savings account and will pay that to HMRC later.

Using the dividend method, Mr Klavier is left with 5,333 as personal income. The overall effective rate of tax is about 47%. That’s more efficient than taking a salary from his company. The dividend rate of income tax is lower than the salary rate of income tax, because it allows a small measure of compensation for the fact that the company could only pay out a dividend, after the company had already suffered corporation tax.

Salary Method

Knowing that his company normally has 10,000 of income every year, Mr Klavier could decide to pay that out as a salary, and his company will need to set up an employer’s payroll account with HMRC. Salary paid to directors and employees is subject to PAYE at source, and the amount deducted each month includes national insurance (employer contribution at 13%), national insurance (employee contribution at 12%), and income tax (at the salary rate of 40%). Salaries are taxed at a higher rate than dividends. At first glance, that works out as 65% of some number. However, it’s a little better than that because the employer contribution of 13% has to be figured in before the headline rate of salary can be announced. A company with 10,000 available can offer a salary of only 8,850. That’s because 13% of 8,850 is 1,150 and this takes up the full quota of this company’s available cash. The employer contribution (the 13% NIC) disappears to HMRC before the commonly understood figure for salary can be established.

Then a smaller figure (the regular salary of 8,850) is subject to employee NIC at 12% and to income tax at 40%.

Annual income	10,000
Employer NIC at 13%	(1,150)
Headline salary	8,850
Employee NIC at 12%	(1,062)
Income tax at 40%	(3,540)
Net salary	4,248

The good news is that there is no 20% corporation tax to pay, because the company has no profit. The company income was 10,000. The allowable expenses (the gross salary) came to 10,000 and the remaining profit is NIL.

Using the salary method, Mr Klavier is left with 4,248 as personal income. The combination of income tax and National Insurance contributions leads to an effective rate of tax of 58%.

Additionally, the government will silently thank Mr Klavier for swelling the coffers of The Exchequer.

Comparison

20% or 47% or 58%

If you roll up all of the company money in the business bank account, you can pay no more than 20% corporation tax. However, there will be some capital gains tax to pay when you finally stop trading. Be warned, HMRC does not like you doing this, because you are not be commercial. They are right, the Companies Act 2006 requires you to run your business on a commercial basis, and businesses are generally not in the business of sitting on mountains of cash waiting for the director/shareholder to retire.

So you should extract a commercially viable figure. As dividends or as salary. You probably need to do that anyway, in order to live! You need personal money. The company money is not your money.

Do you want to pay a combined tax bill at an effective rate of tax of 47% or 58%? Will the government use your extra tax payments wisely?

More importantly, if you go down the salary route, do you want the extra admin of running an employer’s payroll account and making monthly remittances of PAYE to HMRC? Or, perhaps incurring the cost of engaging a payroll bureau to do the admin for you?

By running a payroll you can do tedious admin, pay more tax overall, and impede your cashflow.

It’s your call, it’s your business and you are the director/shareholder. What does your business plan say about remuneration? What does your strategy say about maintaining corporate and personal tax reserves?

Director shareholder payments 2021/22

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2022.

Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit, then you can pay no dividend. Take care not to pay dividends out of investor funding or out of bank loans. Investor funding and bank loans are not “profit”.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers	year ended 5 Apr 2022
Monthly figures
Salary	736
Primary “Tax Free” drawings (personal allowance)	311
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings (max) liable to 7.5% tax	2975

Provided always that the monthly income does not total more than	4188
Put aside 7.5% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40%	year ended 5 Apr 2022
Monthly figures
Salary	736
Primary “Tax Free” drawings (personal allowance)	311
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings liable to 7.5% tax	2975
Supplementary drawings (max) liable to 32.5% tax	4145

Provided always that the monthly income does not total more than	8333
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45%	year ended 5 Apr 2022
Monthly figures
Salary	0
Primary “Tax Free” drawings (personal allowance)	0
Secondary “Tax Free” drawings (dividend rate band)	166
Tertiary drawings liable to 7.5% tax	2975
Supplementary drawings liable to 32.5% tax	5192

Additional drawings liable to 38.1% tax	excess over 8,333.00
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.
And put aside 38.1% of your additional drawings as a personal tax reserve.

Is this legal?

Yes.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

The Abatement Dilemma

You may have to pay more income tax if your annual income exceeds £100,000 as a result of the abatement of the annual personal allowance. The allowance is gradually reduced until it is eliminated in full.

The annual personal allowance is:

2018/19 – 11,850
2019/20 – 12,500
2020/21 – 12,500

Once your “adjusted net income” exceeds £100,000 your personal allowance is reduced by £1 for every £2 of income over and above £100,000.

For example

If in 2019/20 you have income of £120,000 and make (gross) pension contributions of £5,000 then your adjusted net income is £115,000.

It’s over the £100,000 limit and so the annual personal allowance is reduced. The £12,500 is reduced by £1 for every £2 by which your income exceeds £100,000.

The reduction in the personal allowance is therefore £7,500 (half of (£115,000 minus £100,000)).

The personal allowance for 2019/20 becomes £5,000.

The 60% tax zone

When your net income falls within the zone in which the personal allowance is reduced (that’s from £100,000 to £125,000) then the marginal rate of tax is 60%. This is the combined effect of the application of the higher rate of tax and the reduction in the personal allowance. Currently for 2019/20 the upper end of the band is £125,000 but that may not be true for other years, the strict upper limit is £100,000 plus twice the personal allowance.

Stealth Tax

Abatement was introduced on 6 Apr 2010 when the threshold was set at 100,000. Almost every year the annual person allowance goes up and tax rate bands are adjusted. However, the abatement threshold has never changed. This means that over time more people are becoming liable to 60% tax. If your employment or self employment income is over 100,000 then there is National Insurance at 2% as well. Don’t let anybody tell you that the highest rate of tax in the UK is 45%, it’s 62%.

Options

There are three options, none of which is easy:

1. Pay the tax
2. Reduce your income below £100,000
3. Increase your income so much that a mere 62% on a 25,000 tranche of your income pales into insignificance.

Don’t dismiss that last one. All you need is a plan. What does your business plan say?

Self Assessment Tax Return

A Checklist

Self assessment tax returns require an extensive amount of personal information.

They encompass income, capital gains, outgoings, residence status, student loans, child benefit and more. They are no longer called income tax returns and you need to take care to include everything that a self assessment tax return requires.

With very few exceptions, the self assessment tax return requires a full disclosure of your worldwide income. There are checks and balances to ensure that you are not subject to double taxation. As your accountant, we need you to make a full disclosure of everything. We would rather have too much information than not enough. Nobody wants HMRC to start an enquiry because something was omitted from a tax return.

You should remember that in UK law the final responsibility for submitting a full and complete tax return (and for paying the tax on time) rests with you, the taxpayer.

Please follow this guide carefully and let us have the information and the documentation detailed below. For self assessment purposes the tax year started on 6 April (more than one year ago) and ended on the 5 April which has recently passed.

1. Tax Return Notice

In order that we can keep track of dates, tax offices and reference numbers, please let us have either a copy of page one of your tax return, or the “Notice to File”.

HMRC get things wrong sometimes. It’s important that we have this document in case any disputes arise. Without the notice it may be difficult to challenge interest charges and penalties. That can depend on many factors, including the date on the notice, the spelling of your name, the address it was sent to, and whether or not it was even issued.

If you do not have a paper document within a few days of 5 April, then please provide us with a copy of the the digital “Notice to File” from your personal tax account on the Government Gateway. Accountants cannot access your Gateway account as it covers many Government services and not only tax.

Please note that you know that when you go to your personal tax account online will be asked to agree to communicate digitally by default. If you consent, subsequent communication including statutory notices will be sent digitally, and you will never again get a paper version.

2. Changes since last year

Have you changed your address, your phone number, your name (by marriage or otherwise), or have you married (or entered into a civil partnership)? Please keep us up to date with your correct details.

3. Student Loans

A copy of the Student Loan account statement showing the transactions between 6 April last and 5 April just gone.

Tell us if an old loan has been fully paid off since 5 April just gone as we will need to make an adjustment to ensure that you do not overpay.

You cannot get this data from the Student Loan Company web site. Yes, ridiculous, we know! Send them a paper letter as set out in this report and ask them for a paper statement.

4. Residence and Domicile

Are you resident outside the UK? We will need a detailed schedule of the days you have spent in the UK during the past tax year (from 6 April to 5 April), detailing the date of arrival and the date of departure. Of those days, how many were for social purposes and how many were for work purposes? A UK work day only counts as a work day when you did more than 3 hours of work in the UK on that day.

Is your Domicile outside the UK?

In UK law the word “domicile” does not mean your address, it means your natural home. This is especially important for people who were not born in the UK or whose parents were not born in the UK, or for people have moved away from the UK and have permanently elected (and proven) that they have established a natural home elsewhere.

There are complex tax rules for people who have a non-UK domicile and who have foreign income or gains. Regardless of your “domicile”, UK residents are taxed on their worldwide income or gains. However, if you do have a non-UK domicile, you may be entitled to claim tax relief on foreign income which is not remitted into the UK. If this applies to you please discuss the situation with us.

If you are not resident in the UK, then we need to consider the Statutory Residence Test which determines residence status for tax purposes. This link is just for information . . .

https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt

. . . and we will work through the process with clients who are affected.

5. Bank Interest and other Investment Income

Investment income like bank interest and dividends are taxed according to the date they are paid, not the date they are declared. Please be sure to check you have figures for the right year, especially if payment dates fall close to 5 April.

Please provide copies of certificates of Bank Interest Received, dividend vouchers and other documents showing amounts of investments received. Banks and other financial instutions are required in law to provide you with these certificates. They submit the same documents to HMRC as part of the financial instution’s tax reports, so we need to be sure that the figure on your tax return is the same figure they told HMRC.

Some banks pay “rewards” and do not pay interest. Check the year end certificate from your bank to see precisely what sort of income you have. Some deduct tax at source, whilst others do not. Different rules, rates and allowances apply to different types of investment income so it’s vital that you provide full and accurate information for every different account and every different type of investment.

6. Employees and Directors

A copy of form P60 for all roles held as at 5 April.

A copy of form P45 for all roles that ended during the tax year.

Employers are required by law to issue forms P60 by 31 May following the relevant 5 April. Forms P45 are issued when you leave an employer, normally within 7 days of your leaving date.

7. Student Loan Repayments via Payroll

As the forms P45 and P60 do not always show student loan repayments, we need a copy of every payslip for each employment you had between 6 April last year and 5 April this year. This recent data is not yet on the Student Loan Co statements, hence we need the payslips.

8. Benefits in Kind and Expense Allowances

If you have a company car or van, or if your salary package includes things like private medical insurance or gym membership, then you might be issued with a form P11d. These are taxable benefits in kind.

There are a few other cases where forms P11d are issued to employees who receive expense allowances. This is less common than it used to be, because HMRC has introduced more exemptions.

For example, a situation where you have paid for business travel, claimed the exact figure, and were reimbursed the exact figure, is exempt from the P11d reporting rules. However, round sum allowances are reportable. Check with your employer if you are not sure about the expense allowances you received.

We will need a copy of form(s) P11d issued “as at” 5 April for all roles held in the last tax year (whether they were still active on 5 April, or not).

Employers are required by law to issue forms P11d (to relevant employees) by 31 July following the relevant 5 April. However, if a P11d is not relevant to you, the employer is under no obligation to tell you that you’re not going to get one. Some employers tax benefits in kind via the payroll, some do not. A process known as “payrolling the BIK”.

Check! Ask “am I due a form P11d”?

9. Receiving an Occupational Pension or a Private Pension Annuity

A copy of the form P60 (or other statement from your pension provider) as at 5 April, showing the gross pension received by you, and the tax deducted.

Pension providers (other than the State Pension) are required by law to issue forms P60 by 31 May following the relevant 5 April.

10. Receiving a State Pension

Annual letters detailing State Pension rates and entitlements are normally issued towards the end of March setting out what your individual rate is. Very few people receive the ordinary rate of State Pension, because the amount is often enhanced by the level of your national insurance contributions. We cannot rely on headline rates, and we need a copy of that letter setting out the rate specific to your case.

This report has more detail of what happens in year one and later years.

11. Child Benefit

Please let us know how much Child Benefit was received during the tax year. Child Benefit may be restricted in some cases where your income is high. See this report for the thresholds.

If you (or your spouse/partner) have children aged 18 or younger then, regardless of whether you receive Child Benefit or have disclaimed it, please let us have a note of each date of birth for those who were aged 18 or below on 5 April just gone. Child Benefit may still be paid in connection with 18 year olds until 30 September following their 18th birthday. Having this information allows us to accurately establish two types of situation:

– Claimants where a claw back becomes due;
– Non-claimants who may now become entitled to claim.

There are complex rules in cases where you or your partner move out or move into the family home part way through a tax year. If this applies to you, please talk to us on a one to one basis.

12. Self Employed Trades and Partnership

Please consider the Annual Accounts Checklist

13. Rental Income

Please consider the Lettings Accounts Checklist

14. Personal Pension Contributions

By “personal pension” we mean a pension policy agreed by you directly with a Pension Provider and paid for using your own private funds.

Personal pensions agreed with a Pension Provider because you are a company director (and your company pays the contributions) are not reportable on a personal tax return – ignore these.

Pension Providers normally issue a certificate PPPC (for each policy) just after 5 April each year.

Please provide a copy of each certificate PPPC or set out an analysis of dates and amounts paid under each separate pension policy, stating whether these were paid gross or paid net.

15. Auto-enrolment Pension Contributions

Under auto-enrolment in the UK, you may have an employer pension where contributions are taken by deduction at source from your pay. There are four ways of doing this and your employer will have elected for one of them when the pension scheme started.

Check with you payroll office, and tell us which “Pension Contribution Basis” applies to these deductions:

• After tax and NI with basic rate tax relief
• After tax and NI with no tax relief
• Before tax and NI
• Before tax and after NI

Please provide us with copies of all your payslips for the tax year as that’s the only way to see the full pension deductions for the year.

16. Gift Aid Contributions

Please provide two analyses showing the name of each gift aid scheme, the commencement date, and the amounts paid. One list is for your regular contributions. The second list is for one off payments for the tax year only.

17. Sundry

Lastly, please consider if any of the following items need looking at more closely:

• New sources of income in that tax year.
• Job Seekers Allowance or other taxable benefits.
• New stock options.
• Qualifying investments in EIS, SEIS, etc.
• Capital gains or losses on shares, securities and other assets.
• Shares acquired under scrip dividends or reinvestment plans.
• Purchases and sales of “second” properties.

If you are unsure about any of these points please feel free to call us.