This new allowance is being introduced from 6 April 2016 and allows the first £1000 of a basic tax payer’s savings income and £500 of a higher rate taxpayer’s savings income to be tax free.
If you have:
- a profitable company and you typically take a small salary and mostly dividends, and
- have loaned money to your company
then there may be a way to combine this new relief with an existing relief.
The existing relief applies a 0% rate to the first £5,000 of savings income where an individual earns less than the personal allowance level plus £5,000 (total £15,600). This might work as follows:
- Draw a minimal salary.
- Charge interest of up to £5,000 on your loan account (assuming you can justify the interest charged).
- Provided salary and interest are less than £15,600 this would all be received tax free.
- If you can charge interest of £5,000 you can now add a further £500 using this new relief which will also be tax free.
- Dividends can be paid without interfering with this model.