As the end of the tax year approaches, Richard Goddard, partner and tax manager at Azets, gives you some tips for examining your personal tax situation.
Do you know all the allowances and tax allowances to which you may be entitled? If you’re not sure, you’re probably paying more tax than necessary. As the end of the tax year approaches on April 5, 2022, now is the time to take action to potentially reduce your tax liability.
IR AND TAX INCREASE PLAN FROM APRIL 2022
A 1.25% increase in National Insurance (NI) and dividend tax applies to remuneration and dividends from 6 April 2022. Family businesses in particular should, subject to commercial considerations , take into account the level of remuneration and dividend distributions for 2021/22. Bringing forward, for example, a dividend payment before April 6, 2022 will save the additional charge of 1.25%, although the personal tax due on the dividend is due by January 31, 2023.
THINKING OF GETTING A NEW CAR?
If you are able to choose a new company car for the year, it may be worth considering changing your car to a less polluting model to save tax. But be very careful, because not all new cars are created equal, especially when it comes to traditional fuel vehicles.
If you choose to go for a car that is fully electric, for 22/23 the proposed benefit in kind is 2%, where it will remain for 2023/23 and 24/25. If it is also considered part of a wage sacrifice agreement, the tax savings can be significant.
Of course, the cheapest option of all is to have an employer-provided bike (bike-to-work program) because, provided it is available to all employees, it does not result in no employment benefits, saves you and your employer tax, and can be very beneficial to your health!
DO NOT PAY YOUR CAPITAL GAINS TAX
Although conscientious objection to paying tax is not a advisable decision, if you sell a type of qualifying asset in 2021/22 that has been used in your business and you realize a capital gain, it possible to defer the payment of tax by reinvesting the proceeds in another qualifying asset. In simple terms, a gain can be rolled over if you purchase another qualifying business asset within three years and will only become payable upon the subsequent disposal of the replacement asset.
Another way to delay paying tax, or even remove the gains from a capital gains tax (CGT) charge, is to invest in EIS where the proceeds from disposing of any asset is reinvested in a business eligible for EIS deferral relief. Of course, eligibility requirements would have to be met to obtain this relief, but deferral relief can still be obtained when the stricter requirements for obtaining the valuable EIS income tax relief are not met.
THE ADVANTAGE OF OPTIMIZING MARRIAGE
Consider the additional tax advantages you can get if you are married (or in a civil partnership) with your partner. In addition to tax-free or tax-neutral transfers between partners for inheritance tax and capital gains tax purposes, you could, in certain circumstances, get additional money from HMRC because of your marriage.
Marriage Allowance may be claimed in certain cases to transfer part of the Spouse’s unused Personal Allowance, when eligibility requirements are met.
In addition, the division of income-producing assets between spouses is a legitimate way to reduce overall income tax liabilities. This could work with investment properties and other income-producing assets such as stocks. However, beware if transferring mortgaged properties, in case of a nasty replica stamp duty. Securing a division of shares between spouses also gives the opportunity for each to enjoy £2000 tax-free dividend allocation.
At the most dramatic end of income tax, the additional tax rate (45% in England, Northern Ireland and Wales, 46% in Scotland) kicks in when income exceeds 150,000 £, which means that if the assets could be donated at a basic tax rate – paying spouse, an annual tax saving of 25% can be realized.
Obviously, the business implications of any transfer would have to be weighed against any potential tax benefit.
REVIEW YOUR PENSION CONTRIBUTIONS
The limit at which an individual can claim income tax relief on pension contributions (the total of personal and employer contributions) is currently £40,000. An individual must also have taxable income at least equal to the amount of his personal contributions. Although you can claim relief at your marginal tax rate, tax relief of 20% at the basic rate is automatically granted on personal pension contributions, which means that this amount will also automatically transfer into your pension. Additional relief available to higher and additional rate taxpayers must be claimed on your tax return (unless it is a wage sacrifice pension, as relief is given at source ). Note that the annual allowance is limited for some high-income people.
If you have not fully used your retirement allowance in previous years, you can also make additional contributions in excess of £40,000 in the current year.
When considering making payments for your pension, it is recommended that you speak to an independent financial adviser for advice on this.
The above items are just a few things to consider when reviewing your personal tax affairs. Please note that this is not advice and you should seek advice based on your particular situation.
In our latest guide, we summarize the various tax saving options available, outlining the various steps you should consider to maximize your tax efficiency, which could lead to those significant cash tax savings. Our guide outlines relevant considerations for income tax, capital gains tax and inheritance.
For more information on any of the areas we have covered, please contact Richard Goddard.
Email: [email protected]