Spring is in the air – at least, it is at the time of writing – the sap is beginning to rise, and the bulbs are starting to push through. But before you give in to the urge to undertake a spot of early gardening, Spring cleaning or DIY, there’s a more pressing chore you need to attend to. It’s one we highlight around this time every year, and this year it’s more important than ever.
We’re talking, of course, about making sure you’ve done everything you can to reduce your tax bill for the current tax year (2021-22), which ends in just a few weeks on 5th April.
The much-heralded National Insurance increases coming into effect from 6th April will hit every taxpayer in their pocket. There’s no way to avoid the tax rise, but there is still time to review your position, check that you’re set up to be as tax efficient as possible and make sure you’re taking full advantage of any opportunities that could help minimise your tax liability.
Your tax position will be unique to you, so you should always seek advice that’s personalised to your circumstances. However, there are some generic questions every taxpayer should ask themself at the end of each tax year:
1. Have I utilised my annual tax-free allowances?
The starting point for any end of year tax review is to check you’ve made full use of any tax-free allowances to which you’re entitled. These allowances – most of which are only available on a ‘use it or lose it’ basis, let you earn a certain level of income without having to pay any tax. Setting allowances against your overall tax liability will help reduce the amount you owe HMRC.
- Basic Personal Allowance
The basic Personal Allowance – available to most taxpayers – lets you earn a certain level of income before becoming liable to pay tax. For the tax year just ending, the Personal Allowance is £12,570. If your income exceeds £100k, this allowance reduces by £1 for every £2 you earn over £100k.
- Marriage Allowance
Marriage Allowance is available to some couples who are married or in a civil partnership. To qualify for Marriage Allowance, one partner’s income must be below £12,570 (the Personal Allowance threshold), and the higher earner must be a basic rate taxpayer. If, as a couple, you meet these criteria, the lower earner can transfer £1,260 of the unused allowance to the higher earner in the form of a tax credit to help them reduce their tax liability.
- Dividend Allowance
If you’re a shareholder, you need to make maximum use of your annual tax-free Dividend Allowance. You can earn up to £2k in dividend income each year without having to pay tax, The allowance is available to everyone, regardless of whether they pay basic rate, higher rate or even no tax at all, and for this reason, it might be worth reviewing the shareholding structure of your business and considering making your spouse, civil partner or another close family member a shareholder.
With Dividend Tax rates due to increase by 1.25% from April 2022, you might also want to consider taking an earlier or higher than usual dividend before the change takes effect.
- Personal Savings Allowance
Most people are eligible to earn some interest on savings from bank, building society and other savings accounts without paying tax. Exactly how much interest you can earn tax-free will depend on your level of income.
Your Personal Savings Allowance lets you earn interest up to £1k interest tax-free if you’re a basic-rate taxpayer, or £500 if you’re a higher-rate taxpayer. If your income is below £12,570, but you earn income through interest on savings, you may also qualify for the starter savings allowance.
- Capital Gains Allowance
If you disposed of certain investments during the current tax year (including second homes, art, antiques and shares), you can earn up to £12,300 of profit tax-free using your Capital Gains Allowance. Married couples and civil partners who own assets jointly can claim a double allowance of £24,600.
- ISA Allowance
Any UK-based taxpayer can open an Individual Savings Account (ISA) and deposit up to £20k (the current maximum investment limit) completely free of income tax.
2. Are there other opportunities to reduce my tax liability?
There are things you can do to reduce your gross earnings – and, therefore, the amount of income on which you’re liable to pay tax. Actions you might want to consider include:
- Making a lump sum payment towards your pension
You might want to think about making an end of year lump sum payment into your pension plan to reduce the income on which you’ll be liable for tax.
While we’re on the topic of pensions, it’s worth checking that you’re fully up to date with payments you’re making towards your state pension. Retirement may seem a long way off, but to qualify for a full basic state pension when the time comes, you’ll need to have 30 years of National Insurance contributions.
- Making an investment
It might make sense to divert some of your income into investments so that you’ll get the benefit of tax relief. If this is something you want to explore further, you should consult your financial advisor for professional guidance
3. Am I about to move into a higher tax band?
Now is a good time to check your earnings aren’t about to tip you over a threshold that will take you into a higher tax band.
There are two key thresholds to be aware of. The first occurs when your annual income exceeds £50k: at this point, you’ll begin to pay the 40% higher rate of tax on your earnings. If you receive child benefit, this is also the point when it will start to taper off. The second critical threshold – mentioned earlier – is when your annual earnings exceed £100k, triggering your Personal Allowance to begin reducing by £1 for every £2 you earn over £100k.
If you’re getting close to one of these thresholds, you might want to take professional advice to help mitigate your tax liability – perhaps by contributing to your pension pot.
4. Am I still operating the most appropriate business structure?
Profit levels can fluctuate over time – especially given the exceptional circumstances of the last two years.
When you initially set up – most likely as a sole trader or a limited company, you’ll have selected the option that best suited your needs at the time. The choice you made informs how you remunerate yourself and pay tax; and comes with different legal and reporting responsibilities.
So, if things have changed, is it still the most appropriate structure for your needs? Is it still the most tax-efficient way to operate your business? If, for example, you operate as a limited company, profits have reduced significantly, and you don’t expect them to reach previous levels again (at least, not in the short-term), it might be beneficial to transition to become a sole trader to save on operating costs and paperwork.
Conversely, you may have started as a sole trader, business may have picked up and perhaps it’s time to go limited. If you’re self-employed and your business year-end runs in parallel with the tax year, now is an excellent time to look at your profit levels and decide if it’s appropriate to make a change
Make sure you don’t pay any more tax than you need to for the current tax year. You need to act quickly, but there’s still time for Inca to review your end of year tax position, ensure you’re as tax efficient as possible and perhaps even save you money!