There are now several allowances that apply to an individual’s income. The way that they interact mean that you can potentially receive £22,500 of tax-free income for 2017/18. How can you ensure you take maximum advantage?


For 2017/18, the personal allowance rose to £11,500. The personal savings allowance (PSA) is available up to £1,000 and the savings starting rate (SSR) can be up to £5,000. Then there is the dividend allowance which is available to all, and is currently £5,000. Because of the way these allowances interact, there is a hypothetical maximum of £22,500 tax-free income available.

Example. Adrian has a salary of just under the NI primary threshold, £8,164, from a family company in which he’s a director shareholder. He received £3,000 in fees for a non-executive director role in an unrelated company. He has dividend income of £25,200 and other savings income of £8,000. His total income of £44,364 is just below the higher rate threshold, so the personal savings allowance is available in full. He will pay tax of £1,848 on this – being £1,515 on the dividends and £333 on the savings income.

Small company owners in particular may find that they can use their flexibility over remuneration to take advantage of this, though there can be opportunities for savings to be achieved with low earnings or pensions but modest savings income too.


The personal allowance is available to anyone with adjusted net income of less than £100,000 per annum. Above this, it is tapered away at a rate of £1 for every £2 of income in excess of the threshold, until it is fully removed for incomes in excess of £123,000. There isn’t an awful lot you can do with the personal allowance; however, there are a couple of things to keep in mind when looking at the bigger picture.

Firstly, it’s often assumed that the allowance must be set against non-savings income before it can offset savings or dividend income. This is incorrect – it’s just that in most cases doing so is most beneficial. You should consider reallocating some of it if it would yield a better result.

Example. John has a salary of £40,500, and dividend income of £50,000 in 2017/18. Offsetting the £11,500 against the salary would give a tax liability of £20,425. If instead he allocates £7,000 to the salary, and £4,500 to the dividends, his liability will only be £19,862 – a saving of £562.

A second consideration with the personal allowance is that it is based on net adjusted income. Therefore, if it is likely to be just over the clawback threshold, bringing forward pension contributions or gift aid payments might mean a higher allowance is available.


The SSR is the allowance that seems to cause the most confusion, particularly for HMRC’s software. It is a nil rate band of up to £5,000 for savings income (such as interest). However, exactly how much is available depends on the amount of non-savings income received. If non-savings income is above the personal allowance, the excess is deducted from the available SSR until it is reduced to nothing. Dividends are not taken into account, which will be good news for small companies.

Pro advice. Note that the SSR is applied to savings income in priority to the PSA. The PSA covers the first £500 or £1,000 not covered by the SSR – even if no SSR is available.

Example. Shona has non-savings income of £14,500 and savings income of £5,000. Her non-savings income not covered by the personal allowance is £3,000 and this reduces the available SSR to £2,000. Together with her PSA (see below) of £1,000, this means £2,000 of her savings income will be liable to tax at the basic rate.


The PSA is available to basic and higher rate taxpayers only, and is set at £1,000 or £500 respectively. In determining whether you are a basic or higher rate taxpayer for the purposes of the PSA, look at the adjusted net income – as you do for the personal allowance. Include all the savings and dividend income, ignoring the allowances.

Pro advice. Just as for the personal allowance, pension contributions, gift aided donations and trading losses all reduce net adjusted income, so look at bringing these forward if only just over the higher rate threshold.


Many won’t be able to do much to take advantage however could always review portfolios to see if shifting from mainly equity to a mix of dividend producing and interest yielding assets might be worthwhile. However, this is likely to be led by the investment objective – usually capital growth – in the main.

Director shareholders may well be using a remuneration strategy that uses a small salary topped up by dividends to extract profit. If things could be restructured so that some interest was payable to replace part of the dividends, a tax saving could be enjoyed. So how could this work?

Firstly, by formally loaning the company money. This is something you can do to fund required working capital, but even if there is no immediate need for money there is nothing to stop you putting cash in and simply charging interest on a director’s loan account in credit. This might seem counterintuitive at first, but remember that the amount in credit can be withdrawn with no tax consequences, and the interest paid to you by the company will really be coming out of future profits – with up to £6,000 of it tax free.

Example. Ursula takes a salary of £11,500 and dividends of £40,000 from her company, which has her and her PA as employees. In 2017/18 the income tax on this mix is £4,250. If she were to inject some cash into the company such that she could charge the company £6,000 interest, and only take £34,000 dividends, this tax would fall to £3,900. The company would also enjoy a saving of £1,140 because the interest would be deductible for corporation tax purposes – provided it’s paid at a commercial rate.

Pro advice. To give an idea of what a commercial rate is obtain quotes from third party lenders in the name of the company. A small business is viewed as a risky borrower, so rates of 6% and higher shouldn’t come as a surprise. Keep the quotes as evidence for HMRC if it queries the arrangement.

A rate of 7% or 8% is likely to be much higher than the best ISA or interest-bearing deposit investments, so it could be worthwhile making the funding by converting these types of asset.


The planning becomes more valuable if a spouse or civil partner can be brought into the business – you could be looking at £45,000 of tax free income in the right circumstances. Then there is always the possibility of using the tax savings to make employer pension contributions for even more efficiency.

It’s likely that the continued attacks on owner-managed companies will make this type of planning more and more relevant going forward – so make a start on it now.

Up to £6,000 of interest income can be received tax free, so your owner-managed company clients could take advantage of both this and the personal and dividend allowances by restructuring remuneration. A two-spouse company could theoretically access £45,000 tax free for 2017/18.