To help you do this, we have identified some of the key points individual taxpayers, business owners and their families should be aware of.
- Income tax
- Maximise your personal allowance
- Pension contributions
- Charitable donations
- Transferring assets to spouse or civil partner
- Make use of an Individual Savings Accounts (ISAs)
- Business taxes
For the tax year ending 5th April 2022, most taxpayers benefit from a personal allowance of £12,570. This allowance is taken from your income and the balance of your non savings income is then subject to tax at the following rates in England, Wales and Northern Ireland:
|Band||Taxable income||Tax rate|
|Basic rate||£12,570 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
In Scotland, the rates for non-savings income differ as follows:
|Band||Taxable income||Tax rate|
|Starter rate||£12,570 to £14,667||19%|
|Basic rate||£14,668 to £25,296||20%|
|Intermediate rate||£25,297 to £43,662||21%|
|Higher rate||£43,663 to £150,000||41%|
|Top rate||over £150,000||46%|
Different rates and allowances apply to non-savings income such as bank interest and dividend income.
It is sensible to try to ensure you maximise both your entitlement to the personal allowance and, wherever possible, reduce your exposure to income tax at the higher rates.
Maximise your personal allowance
You will see that where income exceeds £150,000, you pay the additional rate of income tax, which is 45% (46% in Scotland). Where your income is between £100,000 and £125,140, you are subject to an effective tax rate of around 60%. This is because, after your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 you go over the £100,000 tax bracket.
The good news is there may still be an opportunity to reduce your tax exposure with some simple planning techniques. In some cases, taxable income can be effectively reduced by making personal pension contributions and charitable donations. This can mean you reduce your exposure to higher rate tax and maximise your allowances.
For a basic rate taxpayer, you may also be able to transfer £1,260 of your unused personal allowance to your spouse or civil partner. You can only do this if neither of you is a higher-rate taxpayer.
From a tax point of view, saving into a personal pension can be very efficient.
If you are a basic rate taxpayer and want to save £100 into your personal pension plan, the effective cost to you is only £80. For a higher rate taxpayer, to save £100 could effectively cost you as little as £60. The cost drops down further to only £55 for an additional rate taxpayer.
While potentially extremely tax efficient, there are a number of pitfalls and tax traps which you should consider before taking action.
The amount that may be saved into a personal pension is limited by a number of factors. One of the most important of these is the annual allowance limit.
The annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. In 2021/22 the limit is capped at £40,000. The annual allowance applies across all of your pension schemes and includes contributions made by your employer.
The annual allowance is reduced by £1 for every £2 adjusted income is more than £240,000 but cannot be reduced to below £4,000. Adjusted income is net income plus occupational pension contributions plus employer pension contributions.
Currently, you may carry forward unused annual allowances for up to three years. This is generally subject to you having been a member of a UK registered pension scheme in those previous tax years.
The retirement fund which you can build up is also subject to a lifetime allowance limit. The lifetime allowance is £1,073,100 for 2021/22.
The pension landscape is complicated and there are a variety of ways you may make provision for later years. You also need to be aware there are other factors which can limit the amount you may save, and you should seek professional help if you are not sure about the rules.
You may also need to take investment advice from a registered pension adviser.
Tax relief can also be claimed for cash gifts made to registered charities in the UK and some other countries. The relief works in a similar way to making personal pension contributions.
If you are a basic rate taxpayer and want your chosen charity to receive £100, the effective cost to you is only £80. For a higher rate taxpayer, to provide the charity with £100 could effectively cost you as little as £60. Again, the effective cost drops down further to only £55 for an additional rate taxpayer. You must ensure you have paid sufficient tax for the charity to make the gift aid claim to avoid an unintended tax bill.
Transferring assets to spouse or civil partner
It may make sense to gift some or all of any income producing assets you own to your spouse or civil partner to save tax. There are a number of legal and practical considerations which need to be considered before making any gift. You should also be aware that for this to work, a number of conditions need to be satisfied. Generally, your gift must be to your spouse or civil partner from whom you have not separated and be an unconditional gift. Professional advice should always be taken so your individual circumstances can be reviewed.
Make use of an Individual Savings Accounts (ISAs)
You can save tax-free with an ISA so if you do have some investments, it may be worthwhile seeing if these can be held in an ISA. In the 2021/22 tax year, the maximum you can save in ISAs is £20,000. Potentially an ISA can contain cash, shares, bonds and other permitted investments. A number of age and residency restrictions apply to ISAs and you should consider the need to take investment advice from a registered financial adviser.
At TaxAssist Accountants, we work with business owners to make sure their businesses are tax efficient and we have outlined below some of the key areas which may be relevant to you as we approach the end of the tax year.
It may be beneficial to bring forward qualifying capital expenditure. You may be able to claim tax relief for capital expenditure by claiming capital allowances which can reduce taxable profits. A business can claim the Annual Investment Allowance which provides 100% tax relief on the first qualifying capital expenditure incurred up to a set amount.
Whether you are thinking about investing in a new vehicle, tools, or any other capital expense we can help you weigh up the best time to make your purchase and advise what relief is available. If you have a March accounting period year end, you should bear in mind that you will speed up relief if you make the purchase before rather than after your year end.
In the Spring Budget 2021, a new super deduction in respect of certain capital expenditures was announced which applies for companies from 1st April 2021.
You should speak to your accountant before making a decision about capital expenditure.
In these uncertain times, it has never been more important to check your debtors to ensure any bad debts are appropriately dealt with so you don’t pay tax on income you will never receive.
If your business carries a lot of stock, we can help determine if you should make a specific provision against any slow-moving or damaged stock.
Employing family members
For some businesses it may be appropriate to consider employing spouses and family members. Restrictions apply here and wages must be justifiable and at a commercial rate.
Company remuneration planning
If you do operate as a limited company, we can help determine the correct blend of salary and dividends to keep things tax efficient.
Research and development tax credits
If your company carries out qualifying Research and Development (R&D) activities, you may be able to claim some valuable relief from HMRC.
Broadly, a profitable company with eligible R&D expenditure of £10,000 could enjoy a reduction in its tax liability of £4,370 (£10,000 x 230% x 19%). It is also possible to make a tax refund claim where a company is loss making.
If you have developed new or improved products or processes, please contact us so we can advise if you may make a claim.
Start to plan ahead
If you are thinking of exiting your business, we can help you do this in the most tax efficient manner, but it pays to start planning this early.
At TaxAssist Accountants, our job is to help ensure that you benefit from all the allowances and reliefs you are entitled to. You will pay tax on your taxable profits, so a crucial element of tax planning is to claim all deductible expenses, many of which will be included in your accounting records. We can help scrutinise your books to make sure all expenses are claimed.
Our advice is provided in respect of taxation, but some areas may require financial advice.
Need more help?
We love working with self-employed professionals and independent business owners and if you are not receiving the service and support you deserve from your accountant then please talk to us on 01603 258690 or use our online enquiry form. We offer free initial consultations, advice, and support over the phone or via video meeting if you have any concerns about face-to-face meetings.
Date published 24 Feb 2021 | Last updated 9 Feb 2022This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.