A Limited Company Contractor’s year-end tax checklist

Don’t miss out, be sure to make the most of your tax-saving opportunities before April 6 2022.

The end of the current tax year is almost here, so now is the perfect time to take stock of any unused allowances to reduce your tax bill. This blog explores the top ten ideas to consider to ensure that your contractor take-home pay works as hard as possible.

• Make use of your £20,000 ISA allowance
• If you have a spouse or partner, be sure they’ve also fully used their ISA allowance to ensure you’ve utilised the combined £40,000 allowance
• If you have children, contribute up to £9,000 payments per child into their Junior ISA
• If you’re hoping to maximise your pension savings, you need to consider utilising your pension’s annual allowance of up to £40,000. You can carry forward any unused allowance, but only for the previous three years. So if you’ve already utilised your 2021/22 pension allowance, take a look over your last three years to see if there are any unused allowances available
• 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 to below the additional rate tax band, which begins at £150,000

• • Regain your Personal Allowance, which begins to be withdrawn once your income exceeds £100,000
• Avoid losing out on Child Benefit, which begins to reduce and /or be cancelled once one parent in the household earns more than £50,000 pa
• Release £12,300 in gains this tax year to ensure you’re taking advantage of your Capital Gains Tax (CGT) allowance. An increase is rumoured to be on the cards soon, so be sure to make the most of the current rate whilst you’re still able to
• Use your IHT gifting exception of £3,000 for this tax year
• Minimise your Income Tax Liability – spread any large pension withdrawals over two or more tax years
• Avoid National Insurance Contributions (NICs) by ensuring you pay yourself a low salary and top up your earnings in the form of dividends. Remember that the first £2,000 dividend income 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 have to make any contributions before your company’s financial year-end, so your company qualifies for the deduction in that accounting period.

Always take advice from your trusted contractor accountant before actioning any of the above points.

Tax planning doesn’t end there

Other than actioning the previous ten points before April 6 2022, there are other areas you’re able to focus on to minimise your tax and make your contracting money work as hard as possible for you. However, the following points tend to have a greater impact if started prior to the start of the new tax year, so give them some consideration now and discuss further with your SG accountant.

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 plays an important part in running your Limited Company, but it doesn’t form the entire picture. Your SG Accountant will be able to advise you further based on your own personal and professional circumstances.

Income tax

• Avoid 45% tax by reducing your income below the £150,000 pa threshold. Making pension contributions allows you to reduce your taxable income
• If you’re in a civil partnership or married, be sure you both have sufficient income to use your personal allowance, which is £12,570
• If your adjusted new income is above £100,000 pa, then the personal allowance will be gradually withdrawn. For those with incomes exceeding £100,000 before April 6 2022, who are making personal pension contributions, they’re able to reduce their income to below £100,000 to restore all / some of the 2021/22 personal allowance that would otherwise be 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
• Consider distributing your investment capital between spouses / civil partners. This potentially could reduce the rate of tax incurred on income and gains. If you’re living with your spouse / civil partner, or where the asset that’s to be transferred is an investment bond, then no capital gains tax or income tax liability will arise on transfers between one and another

Pension planning opportunities

• The carryforward rule allows you to use any unused annual allowance for a maximum of three years. If you do have any unused allowance, April 5 2022, will be the last date you’re able to carry it over up to the value of £40,000 from the 2018/19 tax year
• In 2021/22, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000. This should mean the tapered annual allowance will impact fewer pension members from 2021/22 than in previous years. This will ultimately mean higher pension savings, along with the possibility of avoiding a tax charge
• If your adjusted net income exceeds £100,000, then the personal allowance reduces in value by £1 for every £2 earnt. So for the tax year 2021/22, there won’t be any personal allowance for anyone whose adjusted net income exceeds £125,140. By making extra pension contributions, you’ll not only be increasing your pension provisions, but if you’re also subject to the reduced 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
• Pension contributions can also help those with families out. If a single member of a household earns £50,000 pa or above, their child benefits are reduced or even stopped should you earn £60,000 or above
• The death benefit rules 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 this has not yet been done, now is the time to do so. So, in theory a person’s pension plan could provide an income for the people they leave behind, as beneficiaries will be able to 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 the relevant UK earnings. The basic rate tax relief of £720 added by the Government each year is a significant benefit, and the sooner pension contributions are started, the greater they’ll benefit from compounded tax-free returns

ISAs and JISAs

• You’re unable 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

• EISs – 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 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 must be paid by April 6 2022, to be able to carry back an EIS subscription for tax relief in 2020/21
• VCTs – up to £200,000 can be invested, and the maximum income tax relief is 30%. There are no abilities 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 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 may involve the following:

• The timing of the transaction – i.e.- either bringing it forward or delaying it
• Ensuring that all of the available exemptions and reliefs have been taken full advantage of
• 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
• Also, make full use of any available losses

Capital gains tax planning

• Make the most of this year’s annual exemption (£12,300). Any unused amount cannot be carried forward, so be sure to use it all
• You’ll need to make a disposal after April 5 2022, if you wish to defer the tax payment for a year
• If you’re planning on using two annual exemptions close to one another, you’ll need to make one before April 6 2022, and the other one after this date

If you have a spouse / civil partner, ensure they use their annual exemption. You’re able to transfer assets between partners to facilitate this.

Inheritance tax

• Everyone has an annual exemption of £3,000 per tax year. You’re able to carry over any unused exemption for one year, so ensure to check if you have any outstanding and use it before April 6 2022
• The £250 annual exemption cannot be carried over into the next tax year. You’re able to make as many gifts up to the £250 limit as wish, that’ll be free from inheritance tax, so long as the person receiving the gift does not receive any part of the giver’s £3,000 annual exemption
• Suppose you’re lucky enough to have income that’s surplus to your requirements. In that case, 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. An excellent way to do so is by paying premiums into a whole life policy in trust, to provide for any inheritance tax liability

How can your SG accountant help?

It’s your SG accountant’s job to ensure you’re making the most of every available tax opportunity to maximise your take-home pay. So be sure you’re making the most of your money before the new tax year; get in touch with your accountant to understand which options are available to you and how much of each exemption is left for you to utilise.