Updated Tax Planning for 2022/23

We have updated this tax planning guide for 2022/23 following the increase in the national insurance thresholds. The updates have been highlighted.

The tax year ends on 5th April 2022, so March is a good time to do some tax planning for 2022/23. This guide will help you check you’re not going to pay more tax than necessary in 2021/22 and 2022/23.

Most tax payers will pay a higher rate of tax next year due to a 1.25% increase in both the National Insurance and Dividend rates. So you may want to do some tax planning on or before 05-04-2022 to pay tax at the current lower rates.

Below are some tax planning suggestions to consider for everyone, then for directors/shareholders only. 

TAX PLANNING FOR EVERYONE

Use up Income Tax allowances

To recap, everyone has a tax-free personal allowance. Income above that is taxed at different rates depending on the type of income it is and which band of your income (tax band) that income falls into. Earned income, such as a salary or self-employed profit, use up your tax bands before investment income, such as interest and dividends. So if you have a £50,270 salary and £40,000 dividends, all of the salary exceeding your personal allowance uses up your basic (lower) rate band so will all be taxed at the basic (lower) rate of income tax. Then all of the dividends fall into your higher rate band so will all be taxed at the higher tax rate for dividends. Except £2,000 which is covered by the dividend allowance so is taxed at 0%.

Unused personal allowances and tax bands are not available to be carried forward. So it is important to check that you are using them to efficiently each year. If it’s possible to increase or decrease your income, you should do some tax planning to save tax. It’s best to use up the lower rate bands and avoid the higher rate bands. Some planning can be achieve this, such as changing ownership of assets. For example, transferring shares of a company and therefore the amount of dividends paid out. Or creating an employment can increase income. The bands and rates for Scottish residents are here, and for everyone else in the UK are below.

Tax Bands

• £0 – £12,570 Personal allowance
• £12,571 – £50,270 Basic rate band
• £50,271 – £150,000 Higher rate band*
• Over £150,000 Additional rate

Other allowances and bands to consider:

• £2,000: tax-free dividend allowance per person per tax year. This still counts as income so also uses up your tax bands.
• £50,000 – £60,000: child benefit repaid – see below.
• £100,000 – £125,140: personal allowance withdrawn – see below.

The different tax rates for Income and Dividends are as follows:

Use up National Insurance allowances

National Insurance (NI) is payable by employers, employees, and the self-employed. Each of whom have different bands and rates to consider. As with income tax above, it’s best to do some tax planning to use up lower bands and avoid higher bands. You need to have a salary or self-employed profits that exceed the lower limit for the tax year for it to be a qualifying year for your state pension. You need 35 qualifying years for a full state pension. If self-employed profits exceed the main threshold (was the lower earnings limit), a fixed amount of NI is payable at £163.80pa (was £158.60pa). Credits for the state pension will still be gained if profits exceed the lower earnings limit.

* Average over the year. The actual thresholds are £190 per week until 5th July 2022, then £242 per week.

Avoid earning over £50k

As well as paying higher tax rates, you need to pay back any child benefit received if your income exceeds £50,000 for the year. It applies if either parent receives child benefit and if either parent has a total income of £50k or more. The higher earner will need to repay some or all of the child benefit. You will repay a proportion of it if your total adjusted income is between £50k and £60k. As a result the marginal tax rates are 60% for 2 children and over 70% for 4 children.

If the repayment can’t be avoided, consider stopping the child benefit, as this may spare any need to file a tax return. To calculate the amount of child benefit to be repaid, you adjust your total income down for any personal pension contributions and charity contributions. So you could pay more of these contributions to reduce your adjusted total income within the £50k – £60k band to save tax.

Avoid earning over £100k

When your total income exceeds £100,000 the tax-free personal allowance is gradually removed. You get no personal allowance when your income reaches £125,140 or more. In this band of total income, you have a marginal tax rate of 60% (i.e. your tax bill increases by 60p for every £1 your total income increases between £100k and £125k). Also, more benefits are removed such as tax-free childcare. As with the child benefit above, you could pay personal pension or charitable contributions to reduce your adjusted total income within the £100k – £125k band and save tax at 60%.

Claim Marriage Allowance

A spouse or civil partner who does not pay income tax above the basic rate for a tax year, can transfer £1,260 of their personal allowance to their spouse or civil partner. This is provided that the recipient of the transfer does not pay income tax above the basic rate. This can potentially mean a reduction in tax liability of £252. 

Transfer assets to a spouse

If a spouse, or civil partner, pays tax at a lower rate, consider transferring to them income-producing assets. For example, savings, company shares, investment property. This gives the income to the person paying the lower rate.

Check your bank

If you have large sums of cash in ordinary accounts paying very little interest, consider moving cash to other accounts earning a higher interest rate. An Individual Savings Account (ISA) is tax free so make sure that ISA allowances have been fully utilised for all the family, where applicable.

Pay into savings

The ISA maximum subscription limit is currently £20,000 and there is no longer a restriction on the amount that may be invested in a cash ISA. The overall investment limits on ISAs mean that a couple could save a substantial amount in tax-efficient savings accounts. Any adult under 40 will be able to open a new Lifetime ISA. Up to £4,000 can be saved each year (until 50) and savers will receive a 25% bonus from the government on this money. Broadly, money invested in this type of account can be saved until the investor is 60 and used as retirement income, or it can be withdrawn to help buy a first home.

Juniors

Junior ISAs are available to UK resident children (under-18s). Junior ISAs are tax-free and have many features in common with existing ISA products. The maximum annual subscription is currently £9,000. Investments may be made in any combination of qualifying cash or stocks and shares investments. Withdrawals are not permitted until the named child has reached the age of 18, except in cases of terminal illness. It’s possible to transfer Child Trust Funds (CTFs) to Junior ISAs.

National Savings

You can invest regular sums into National Savings banks and building societies. Those willing to accept the possibility of greater risk perhaps equalling greater reward might consider other types of accounts. Such as the stock market, stock market-linked investments or buy-to-let property.

Pay into pensions

One of the best tax planning tips is to pay into your pension because you save tax and keep the money for retirement. Paying personal pension contributions currently gives tax relief at the individual’s highest income tax rate. Personal pension contributions are limited to your earnings. However, employer pension contributions are not limited to earnings but give tax relief to the employer not the employee.

Pension contributions are taxable if the total contributions into all of your pension schemes exceed an annual limit of £40,000 (or less if your total income exceeds £240,000). Any of these unused £40,000 allowances from the previous 3 years can be brought forward and used in the current year if required. There is a lifetime pension limit of £1,073,100.

Consider paying into pensions for family members. The introduction of stakeholder pensions allow contributions to be made for all UK residents, even children, as there is no requirement to have any earnings. Consider making payments of up to £3,600 for family members, as the fund will grow in a tax-free environment. The net cost is only £2,880.

Sell some chargeable assets

Take advantage of tax exemptions. Everyone has a yearly capital gains exemption. This exemption is currently £12,300, and gains up to this figure can be made without tax. Therefore, taxpayers should consider realising gains from investments up to this figure. Gifts between spouses and civil partners are tax free, so it is possible to double the yearly exemptions available by giving shares or other investments to a spouse or civil partner.

Realise losses

With regards to shares standing at a loss, consider selling them so that the loss can be set against any gains made over and above the capital gains annual exemption. If you wish to retain the investment, it could be bought back by the spouse or partner, within an ISA. It will not be tax effective to buy back the investment, unless he or she waits for 30 days before doing so. In addition, you must take care not to fall foul of anti-avoidance legislation. This prevents loss relief where certain arrangements exist, the main purpose, or one of the main purposes, of which is to secure a tax advantage.

Capital gains tax may be deferred through the use of an Enterprise Investment Scheme investment.

Give to charity

Making charitable donations via the Gift Aid scheme is an effective way to reduce taxable income. If you make donations, it is important that you tick Gift Aid so that the charity can benefit from the basic rate tax relief. Higher rate taxpayers should make the necessary claim on their tax return for further relief. If you plan on making future donations, bring these forward to 5th April to get tax relief at an earlier date.

Check your PAYE code

Check your PAYE tax code number for the following tax year is correct to avoid paying the wrong amount of tax.

Don’t get fined!

There are penalties and surcharges for submitting your tax returns late and for paying any tax due late. These penalties increase substantially over time so if you’re already late for the previous tax year, further delays will cost you more – see here.  If you have a second payment on account to pay as a result of the previous year’s tax return, that payment is due by this 31st July.

We can submit your tax return for the year ending 05-04-2022 soon after 05-04-2022, so provide your details to us as soon as possible. The deadline for submission to HMRC is 31-01-2023, however, we need your details by 31st October to guarantee submission by the deadline. Also, the balance of tax due for the year ending 05-04-2022 plus potentially an extra 50% first payment on account is due by 31-01-2023. 

TAX PLANNING FOR DIRECTORS/SHAREHOLDERS ONLY

To recap, it’s important to remember that your company is a completely separate entity from you (director/shareholder), as such, you each pay tax differently. However, the way you take money from your company may or may not affect the company’s tax. So it is important to consider all taxes when you decide how to pay yourself. 

Your company will pay 19% corporation tax on the profit it makes in its accounting year, which is usually different to the tax year. A company usually pays a salary to directors, and has the option of paying out its profit (as dividends) to its shareholders. Your company’s taxable profit includes a deduction for salaries and expenses but not for dividends.

You will pay income tax on your total income in the tax year, including any salary and dividends taken from your company, but not expenses or loans. Also, see above for the various tax bands and rates.

Tax planning before April 2022

On or before 05-04-2022 make sure you use up your tax-free personal allowance of £12,570 with salary/earnings/dividends.

In last year’s tax planning advice we advised a salary of between £8,840 and £12,570, depending on whether your company is profitable and whether you would benefit from the Employment Allowance. If you have sufficient profit reserves in the company, you should top up this salary with dividends covering:

1. any remaining personal allowance (£12,570);
2. your tax-free dividend allowance of £2,000, then;
3. your remaining basic rate band of up to £35,700 at 7.5% (above this dividends are taxed at at least 32.5%).

Other tax planning tips for this month

Consider declaring extra dividends on or before 05-04-2022 to potentially pay a lower tax rate on those dividends by 1.25%. However, you need to be careful that you pay tax in the same or a lower band this year compared to next year. For example, the tax this year on extra dividends is 32.5% if your total income is between £50,270 and £100,000. But the tax next year on dividends is 8.75% if you expect your total income to be less than £50,270.

It’s best to have a similar amount of total income from year to year. This is better than than not using up your basic rate band one year, then going into your higher rate band in the other year. For example, you will save tax of about £9k by declaring total dividends of £35k each year, instead of none this year and £70k next year.

You don’t have to physically pay any extra salary or dividends. Instead, you can credit your directors loan account with the amount. Then you can draw out that amount tax-free at a later date. Or the credit will offset what you’ve already drawn out.

The company must have net profit reserves to declare any dividends. Tax applies to dividends in the current year if you approve the dividend and pay or credit the dividend by the 05-04-2022. As always, you must also prepare the meeting minutes and dividend voucher to support the dividend.

The Changes

Next year, the income tax thresholds and rates remain the same. So the tax-free personal allowance stays at £12,570, and the higher tax rate threshold remains at £50,270. However, there are new National Insurance (NI) rates and thresholds. Employees start paying 13.25% (was 12%) NI on salaries in excess of £823.33pcm (was £797.33pcm in 2021/22) until June 2022, then £1,047.50pcm from July 2022. Directors pay national insurance on an annual basis, so they will pay employees NI if their salary for the year to date exceeds £11,908. Employers start paying 15.05% (was 13.8%) NI on salaries in excess of £9,100 (was £8,840). As mentioned above, all of the dividend tax rates will also increase by 1.25%.

Tax planning from April 2022

We’ve set out below our general tax planning advice on extracting funds from your own company. However, due to the numerous scenarios, which could also change during the year, we may advise you differently on an individual basis.

From 06-04-2022, our advice is that each director/shareholder should take money from the company in the following order:

This assumes you have no other income and there are sufficient profit reserves in the company to take dividends. Profit reserves are accumulated net profits/losses since the company started, less accumulated dividends since the company started.

If you need any specific tax planning advice please get in touch.