As we approach the tax year end on 5 April 2022, we thought it would be useful to provide an outline of a few things you could consider before your accounting year end.
We do not recommend spending money just to save tax! You need to time what you would do commercially any way in order to get the most out of the tax system.
Personal income tax
The income tax bands and personal allowances for the tax year ending 5 April 2022 are as follows:
Personal allowance – £12,570
Basic rate band – 20% income tax – £12,571 to £50,270
Higher rate band – 40% income tax – £50,271 to £150,000
Additional rate band – 45% income tax – £150,001 and over
The proposed tax bandings for 2022/23 are the same as those listed above.
Every individual has a personal allowance of £12,570, which means any income up to this amount is tax free. Any additional income is taxed at between 0% and 60%, depending on the income source. However, once your taxable income exceeds £100,000, the tax free personal allowance is reduced by £1 for every £2, which means that income of between £100,001 and £125,140 is effectively taxed at 60%, with income over £150,000 being taxed at 45%.
Making pension contributions and gift aid donations will not only help preserve your personal allowance, but can also reduce the rate at which your income is taxed. You should also ensure you make use of income tax free investments such as ISAs, National Savings and insurance bonds.
Allowances introduced from April 2016 mean the first £1,000 of savings income is tax free for basic rate tax payers (£500 for higher rate taxpayers).
Dividend tax rates
The dividend allowance, first introduced in April 2016, was reduced to £2,000 from April 2018. This means that the first £2,000 each of dividend income is tax free.
If you run your business through a limited company, consider shares being held by family members to make best use of their £2,000 exemptions, possibly using different classes of shares, although remember income sources gifted to minors will remain taxable on the parents.
Provided you have enough ‘relevant earnings’ in the year, it may be tax efficient to make, or increase, pension contributions before 5 April 2022, especially where you have unused relief to carry forward from the previous three years. Pension contributions save tax at the higher and additional rates although tax relief is generally only available for pension contributions of up to £40,000 a year.
Child benefit high-income charge
For individuals, where they or a partner receive child benefit income, a claw back of the child benefit is made where either person has taxable income of more than £50,000. Income may be reduced in the same way as above e.g. by making pension contributions to help reduce any claw back.
Married couple’s allowance
Up to 10% of the personal allowance may be transferred to your spouse, providing that one of you have income below the personal allowance and the other has income within the basic rate tax band. This can help save up to £250 for lower earning couples. A little known tax year end planning option.
Buy to let property
It has always been possible to claim tax relief on mortgage interest paid against rental properties. However, from 6 April 2017, this relief is being phased out and restricted to the basic rate of tax only for residential property lets. From 2020/21 onwards all finance costs will be given as a basic rate tax reduction.
Rent a room relief
This relief is currently £7,500 a year so individuals can rent a room in their home for £144 per week tax free. The allowance is split between couples. If income exceeds £7,500, it will be taxable.
Property and trading income allowances
From 6 April 2017, a £1,000 tax free allowance was introduced for profits coming from trivial trading and rental activities, to help taxpayers avoid having to complete a tax return where they make a small amount of profit from trading or renting their homes, such as through online sites such as eBay and Airbnb. Income of up to £1,000 per annum from trading or property activity is tax free or can be deducted as an allowance if your profits are higher, instead of claiming relief for actual costs incurred.
Enterprise Investment Scheme
Carry back of income tax relief – where higher rates of tax were paid in the previous tax year, it is possible to make investments now and claim tax relief for the prior year. This can be achieved using Enterprise Investment Scheme (EIS) or Seed EIS investments, using trade losses or losses on unquoted shares, as well as by giving to charity.
Capital Gains Tax – Annual exemption and CGT rates
Every taxpayer has an annual exempt amount which is lost if not used. For 2021/22, the exemption is £12,300. CGT rates for individuals remained at 20%/10% (20% for trustees) since 2016/17 for disposals other than on residential property (extra 8%) and the timing of capital gains can help minimise CGT.
If you would like to discuss this further please do not hesitate to contact us. You can call us on 01823 218550 or email email@example.com and we will get back to you as soon as possible.
The content of this newsletter is for general information only and does not constitute tax advice.
It should not be relied upon and action which could affect your business should not be taken without appropriate professional advice.