Tax tip: use of personal allowances

The personal allowance (PA) offers £12 570 of tax-free income. It cannot be carried forward or transferred so ‘use it or lose it’.

Small family companies could generate an income stream for family members below the PA by paying remuneration or dividends. If the former a corporate deduction will be available as long as the payment is made for business purposes and is in line with duties performed.

As the primary NIC threshold is now aligned with the PA the employee will have no NIC liability (although a payment of £12 570 would trigger a small secondary NIC charge). Any earnings paid over the lower earnings limit of £6 396 (£123 a week) will count towards the taxpayer’s contribution record for state retirement benefits.

The dividend route has no PAYE or NIC issues but there is no corporate deduction. If shares are in place a...