The end of the current tax year is fast approaching, so now is the perfect time to take stock of your unused allowances to reduce your 2021/22 tax bill. So what should you be considering to ensure you’re contractor take home pay is working as hard as possible for you?
In this blog we take a look at the ways to do just that.
- Make full use of your £20,000 ISA allowance
- If you have a spouse or partner, ensure they’ve also used their ISA allowance. This will give you a total of £40,000 allowance
- If you have children, you’re able to make up to £9,000 per child into their Junior ISA
- If you’re focusing on your pension, it’s worth considering utilising your annual allowance. You’re able to carry forward any unused allowance, for the previous three years. It’s worth taking a look back over your past three years, to ensure you’ve utilised all of your allowance
- For high income earners, by making pension contributions or charitable donations you’re able to reduce your taxable income. By doing so you’re able to:
- Reduce your income to below the additional rate tax band, which currently begins at £150,000
- Regain your Personal Allowance, which begins to be withdrawn once your income exceeds £100,000
- Avoid losing out on Child Benefit, which begins to reduce in value / be cancelled completely once one parent in the household earns above £50,000 pa
- Release £12,300 in gains this tax year, to ensure you’re taking advantage of your Capital Gains Tax (CGT). There’s a rumour of an imminent increase, so ensure to make the most from the current rate whilst you’re still able.
- Use your £3,000 IHT gifting exception
- Minimise your Income Tax Liability – spread any large pension withdrawals across two or more tax years
- Avoid National Insurance Contributions (NICs) by paying yourself a small salary, which you top-up with dividends. The first £2,000 in dividends is tax-free
- Reduce your Limited Company’s liability to Income Tax (including on dividends), Corporation Tax and NICs, by diverting your company’s pre-tax profits into a personal pension. You need to make any contributions prior to your company’s financial yearend, so that your company qualifies for the deduction in that accounting period
Tax planning doesn’t end there!
Apart from actioning the previous ten points before 6 April 2022, there are other ways in which you can minimise your tax and make your money work as hard as possible for you. The following points tend to have a greater impact if started before the new tax year, so if there are any areas you’d like to discuss, get in touch.
Bear in mind that this list isn’t exclusive, and only includes and covers tax opportunities that are available to those who reside within the UK for the 2021/22 and 2022/23 tax years. Tax planning is an extremely important part of running your Limited Company, but it doesn’t form the whole picture. We will be able to advise you further based on your personal and professional circumstances.
- Avoid 45% tax by reducing your income below the £150,000 pa threshold. By making pension contributions you’re able to reduce your taxable income, whilst also making your money work for your future
- If you’re married / in a civil relationship ensure you both have sufficient incomes in order to be able to use your personal allowance at £12,750
- If your adjusted new income exceeds £100,000 pa then the personal allowance will gradually be withdrawn. If you are earning above £100,000 pa before 6 April 2022and you’re making personal pension contributions, you’ll be able to reduce your income to below £100,000 to restore all / some of the 2021/22 personal allowance that would otherwise have been lost
- Invest in tax-free investments such as ISAs. This replaces taxable income and gains, with tax-free income and gains, or investment bonds which are able to provide valuable tax deferment
- Consider distributing your investment capital between your spouse/civil partner. This could potentially reduce the rate of tax incurred on income and gains. If you live with your partner, or where the asset that’ll be transferred is an investment bond, there won’t be any capital gains tax or income tax liability on transfers between one and another
Pension planning opportunities
- You’re able to carry forward any unused annual allowance for a maximum of three years. 5 April 2022 will be the last date you’re able to carry over any unused allowance up to the value of £40,000 from the 2018/19 tax year
- In 2021/22 the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000. This should mean that less pension members will be impacted be the tapered annual allowance from, 2021/22 than in the previous years. This will ultimately mean higher pension savings, along with the possibility of avoiding a new tax charge
- If your adjusted net income exceeds £100,000, then the personal allowance reduces in value by £1 for every £2. So for tax year 2021/22 there won’t be any personal allowance for anyone who’s adjusted net income exceeds £125,140. By making extra pension contributions you’ll not only be increasing your pension provisions, but if you’re also subject to reduced personal allowance, then a personal pension contribution could regain some of this allowance therefore giving an effective tax saving of around 60%, and potentially more with salary sacrifice
- If you have a family, then pension contributions could also help you out. If a single member of your household earns more than £50,000 pa then your child benefits will be reduced, and if a member earns £60,000 pa or more than child benefits will end all together
- The death benefit rules on pensions from 6 April 2015 should have instigated a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not yet been done, then now is the time to do so. So in theory a person’s pension plan could provide an income for the people they leave behind, as beneficiaries will be able to pass the money to their children and so on and so forth
- Individuals should consider making personal net pension contributions of up to £2,880 (£3,600 gross) per year for members of their family. This includes any children and grandchildren, who do not yet have any relevant UK earnings. The basic rate of tax relief of £720 added by the Government each year is a significant benefit, and the sooner pension contributions are started the greater they’ll benefit from compounded tax-free returns
ISAs and JISAs
- Sadly you’re not able to carry forward any unused subscription amount into the new tax year. Therefore any annual subscriptions (£20,000 and £9,000 respectively), should be maximised prior to 5 April 2022
EISs / VCT
- EISs – you can invest up to £1 million, or £2 million when any amount above £1 million is invested in knowledge-intensive companies. 30% is the maximum income tax relief. Unlimited capital gains tax deferral scheme relief – so long as some of the EIS investment could potentially qualify for income tax relief. This must be paid by 6 April 2022, in order to be able to carry back an EIS subscription for tax relief in 2020/21
- VCTs – up to £200,000 can be invested, and the maximum income tax relief is 30%. You’re not able to defer any capital gains tax, but any dividends and capital gains generated on amounts invested within the annual subscription limit are tax-free
Be aware – of the likely higher risk in investment and lower liquidity that will need to be accepted in return for the enticing tax reliefs offered by EISs and VCTs.
Capital Gains Tax (CGT)
CGT planning is based around the action either ahead of, or at the time of the disposal of an asset to reduce or eradicate a current or future liability to CGT. This process may involve the following:
- The timing of the transaction – ie either bringing it forward or delaying it
- Ensuring all of the available reliefs and exemptions have been taken full advantage of
- Depending on your own personal objectives, prior transactions such as transfers to a spouse/civil partner, or the use of a trust
- Making full use of the annual exempt amount
- Also make full use of any available losses
Capital Gains Tax Planning
- Make full use of this tax year’s annual exemption of £12,300. Any unused amount cannot be carried forward, so be sure to make full use of the total amount
- You’ll need to make a disposal after 5 April 2022 should you want to defer the tax payment for a year
- If you’re planning on using two annual exemptions close to one another, you’ll need to make one prior to 6 April 2022, and the other after this date
If you have a spouse / civil partner ensure they use their annual exemption. You’re able to transfer assets between partners to facilitate this.
- Everyone has an annual exemption of £3,000 per tax year. If you have any unused exemption you’re able to carry it over for one year, so make sure you’ve used your full allowance before 6 April 2022
- The £250 annual exemption cannot be carried over into the new tax year. The number of gifts up to the value of £250 you’re able to give is limitless, which are free from inheritance tax, so long as the person receiving the gift does not receive any part of the giver’s £3,000 annual exemption
- If you have income that’s surplus to your requirements, it might be a good idea to establish a plan whereby you give regular gifts from your income in order to make use of the normal expenditure out of income exemption. One way to do this is to pay premiums into a whole life policy in trust, to provide for any inheritance tax liability
How can your Aardvark Accountant help?
It’s the Aardvark team’s job to ensure you’re making the most from every available tax opportunity that’s available to you, and will help to maximise your take home pay. Make the most from your money before the new tax year begins, get in touch with your accountant to discuss which options are available to you, and how much of each exemption is left for you to use.