A Limited Company Contractor’s year-end tax checklist
The current tax year ends 5 April 2022, so now is the time to take stock of any unused allowances in order to reduce your tax bill. In this blog we explore the top ten things to consider to ensure your Limited Company is working as hard as it possibly can.
- Use your £20,000 ISA allowance
- If you’re married or have a partner, ensure they’ve also used their £20,000 ISA allowance
- If you have any children, you’re able to contribute £9,000 in payments per child into their Junior ISA
- Consider utilising your pension’s annual allowance of up to £40,000. You’re able to carry forward any unused allowance for a maximum of three previous years, so if you’ve used up your 2021/22 allowance take a look over the previous three years to see if anything is left
- If you’re a high income earner you’re able to reduce your taxable income by making pension contributions or charitable donations. By doing so you’re able to:
- Reduce your income below the £150,000 additional rate tax band
- Regain your Personal Allowance which starts to be withdrawn once your income exceeds £100,000
- If you have children avoid losing out on Child Benefit which begins to be reduced once a parent in your household earns above £50,000 pa, and is stopped altogether once a parent earns £60,000 pa
- Take advantage of your Capital Gains Tax (CGT) allowance by releasing £12,300 in gains this tax year. An increase is rumoured to be on the horizon, so be sure to make the most of the current rate whilst you’re able to
- Use your £3,000 IHT gifting exemption for this tax year
- Spread large pension withdrawals over two tax years or more to minimise your Income Tax Liability
- Pay yourself a small wage and ‘top it up’ with dividends, to avoid National Insurance Contributions (NICs). Remember that the first £2,000 of dividends is taxed at 0%
- Reduce your 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’ll need to make any contributions prior to your company’s financial year-end, so your company can qualify for the deduction in that accounting period
Tax planning doesn’t end there
Other than ensuring you’ve actioned the previous ten points, there are other things you can be doing to minimise the amount of tax you pay and therefore maximise your take home pay. It’s advised you start them as early in the new tax year as possible, for them to have the greatest impact, so be sure you to discuss them with your accountant.
Be aware! This list isn’t exclusive and only includes and covers the 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 important part of running your Limited Company, but it isn’t the full picture. Your accountant will be able to advise you further on what’s the right fit for you, based on your personal and professional circumstances.
- Avoid 45% tax by reducing your income to below the £150,000 pa threshold. Making pension contributions allows you to reduce your taxable income
- If you’re married or in a civil partnership, be sure you each have sufficient income to use your personal allowance, which is currently £12,570
- If your new adjusted income is above £100,000 pa, then the personal allowance will gradually be withdrawn. If your income exceeds £100,000 before 6 April 2022, if you’re making personal pension contributions which allow you to reduce your income to below £100,000 pa, you’ll be able to restore all / some of the 2021/22 personal allowance that would’ve otherwise been lost
- Consider investing in tax-free investments, such as ISAs. This will replace taxable income and gains, with tax-free income and gains, or investment bonds which can provide valuable tax deferment
- If you have a partner or spouse, consider distributing your investment capital. This could potentially reduce the rate of tax incurred on income and gains. If you live with your spouse / civil partner, or where the asset that’s to be transferred in an investment bond, then no capital gains tax or income tax liability will arise on transfers between one and another
Pension planning opportunities
- Through the use of the carry forward rule, you’re able to use any unused annual allowance for a maximum of three years. If you have unused allowance you’ll only be able to use it up to April 5 2022, up to the value of £40,000 from the 2018/19 tax year
- The threshold income level and adjusted income level for the tapered annual allowance in 2021/22 are £200,000 and £240,000. This should mean that the tapered annual allowance will impact fewer pension members from 2021/22 than in previous years. This will therefore ultimately mean higher pension savings, along with the possibility of avoiding a tax charge
- If your adjusted net income exceeds £100,000 the personal allowance reduces in value by £1 for every £2 earnt. So for example, for the tax year 2021/22 there will not be any personal allowance for anyone whose adjusted net income exceeds £125,140. If you make extra pension contributions you’ll not only be increasing your pension provisions, but if you’re subject to the reduce personal allowance, then a personal pension contribution could claw back some of this allowance, giving an effective tax saving of around 60%, and possibly more with salary sacrifice
- If you have a family then pension contributions could also help you out. If a single member of a household earns £50,000 pa or above then their child benefits are reduced, and if they earn £60,000 pa child benefit stops altogether
- The death benefit rule on pensions from April 6 2015, should have instigated a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If you’re yet to do this, then now is the time! In theory a person’s pension plan could provide an income for those that are left behind, as beneficiaries can 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 family members, including any children and grandchildren, who do not yet have any relevant UK earnings. The £720 basic rate tax relief that’s added by the government yearly 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, so any annual subscriptions (£20,000 and £9,000 respectively) should be maximised before April 6
EISs / VCTs
- EIS – you’re able to invest up to £1 million, or £2 million, where any amount above £1 million is invested in knowledge-intensive companies. The maximum income tax relief available is 30%. Unlimited capital gains tax deferral scheme relief – so long as some of the EIS investment could potentially qualify for income tax relief. It has to be paid by April 6 2022 in order to carry back an EIS subscription for tax relief in 2020/21
- VCTs – up to £20,000 can be invested, and the maximum income tax relief is 30%. Sadly you’re unable to defer 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 that’s 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 could involve the following:
- The timing of the transaction i.e. either bringing it forward or delaying it
- Ensuring you’ve taken full advantage of all the available exemptions and reliefs
- Depending on what your own personal objectives are, prior transactions such as transfers to a spouse / civil partner, or the use of a trust
- Making full use of the annual exempt amount
- Make full use of any available losses
Capital Gains Tax Planning
- Make full usage of this year’s annual exemption of £12,300. You’re unable to carry forward any unused amount, so ensure you use it all
- Make a disposal after 5 April 2022, should you wish to defer the tax payment for a year
- If you’re planning on using two annual exemptions close to one another, you need to make one before April 6 2022, and the other after this date
If you have a spouse / civil partner, make sure they’ve used their full annual exemption. You can transfer assets between partners to facilitate this.
- Each person has an annual exemption of £3,000 per tax year. If you have any unused exemption you’re able to carry it over for a maximum of one year, so be sure to check whether you have any outstanding exemption and use it before April 6 2022
- You’re unable to carry over the £250 annual exemption into the new tax year. You can make as many gifts as you like up to the value of £250, which is free from inheritance tax, so long as the person receiving the gift will not receive any of the giver’s £3,000 annual exemption
- If you’re lucky enough to have income that’s surplus to your requirements it could 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 great way to do so is by paying premiums into a whole life policy in trust, to provide for any inheritance tax liability
How can Taxevo help?
Tax can be confusing and it’s easy to make mistakes, especially when you’re busy running your own contracting or freelancing company. Get the facts and numbers correct first time, with a Taxevo accountant. We can advise you based on your personal and professional circumstances, and ensure you’re making the most from your take home pay as possible. Get in touch today to find out more.