Many tax changes came into effect from 5 April 2016 and now is a good time to reassess the structure of your private practice to help minimise your tax liability going forward.
For many consultants, their private practice is a major part of their income and with the right planning you may be able to reduce your tax liability.
Below I cover two key areas that are likely to affect consultants from 6 April 2016.
Tapering of the Annual Allowance – This is particularly important if your taxable income exceeds £110,000.
In simplified terms, the Annual Allowance is the maximum amount of tax free growth an individual’s pension savings can grow by in any one year (this also includes the value of payments into a private pension). The annual allowance limit is set by HMRC and is currently £40,000. If an individual exceeds this limit they may have additional tax to pay.
From 6 April 2016 where an individual has “adjusted income” (basically, taxable income plus pension growth) between £150,000 and £210,000 their annual allowance will be tapered down from £40,000 to £10,000 on a sliding scale. This change could increase consultant’s tax liabilities by £13,500! It may be possible to avoid this by changing your business structure. If your taxable income is expected to exceed £110,000 then you may benefit by reviewing this.
Dividends – The taxation of dividends is changing from 6 April 2016 and a simplified version of the tax rates is shown below:
In straight forward terms, the tax rates on dividends have increased by 7.5% with the first £5k of dividends being taxable at 0% from 6 April 2016.
Following the introduction of the annual allowance tapering, tax rates as high as 69.5% can arise and therefore despite the increase in tax rates on dividends, it can still be very tax efficient to use a limited company structure.
There are however other structures that one can adopt and given the significant tax changes, now is an ideal time to review your business structure to see if you could reduce your tax liability. There is no one size fits all approach and it is likely that your business structure may well be different to that of your colleague(s) to meet your own personal needs.
Contact Aaron Swinton using the details below if you would like a free no obligation discussion to see if he can reduce your tax liability.
This article has been provided as a general guide only and does not constitute financial advice. Before taking any action you should seek professional advice.