Seven top tips for Limited Company contractors to reduce your income tax bill in 2021
We’re now well into the new tax year, and whilst tax might be at the back of your mind, it’s still well worth understanding its importance and how making it work in your favour could save you money.
In this blog we explore the top seven things you can do to reduce your tax bill and ultimately increase your contractor take home pay.
- Make pension contributions
Your pension contributions are made from taxed money. But whilst the taxpayer puts in the net amount (for example 80% if you’re a basic rate tax payer), HMRC will contribute the tax paid on the contribution, directly into your pension scheme. By doing so it means the entire amount is invested tax-free, so £80 from the contractor and £20 from HMRC. Once the money is held within the pension the investment will grow without income tax and capital gains tax. If you’re a UK resident that’s under 75 who’s not already receiving their pension, then you’re generally still able to contribute £40,000 from your earnings and obtain this tax relief.
- Make contributions to your partner’s pension
If your partner isn’t earning, so long as you’re paying tax you’re able to contribute to their pension scheme in a tax-efficient manner. So long as your partner is a UK resident, not earning themselves and not already receiving a pension, you’re able to contribute up to £3,600 per year into their pension. You’ll be able to input a maximum of £2,880, and HMRC will top it up with the remaining £720 to total the £3,600.
- Use any of your unused pension annual allowance
Ensure you’ve used any of your unused allowance. If you have the funds and are a tax-payer that’s not yet reached the £40,000 limit, then be sure to make the most of your availability. Plus, if you have excess allowance from the previous three years, you’re able to use it.
- Give a gift to charity
If you sign a gift aid declaration when giving to charity, it’s exempt from income tax. For example, if you gifted £80 of taxed money to charity, HMRC pays the additional 20%, so the charity will receive £100 in total. If you are a higher or additional rate tax payer then the tax bands are extended, so they will gain greater relief at their highest rate.
- Transfer investments to your partner
If you have investments with your spouse, it’s advised to revise them annually to ensure they’re in the best proportion for tax purposes. If your funds are generating interest, and your spouse doesn’t have total earnings from employment, trading or property that exceeds £17,570 in 2021/22, the first £6,000 of the received interest is tax-free. If your spouse does have non-savings earnings above this amount, basic rate taxpayers should earn a minimum of £1,000 interest and £500 for higher rate taxpayers to be able to take advantage of the personal savings allowance. Should the investment income generate dividends each spouse should hold enough capital to generate dividends of £2,000 (which is the annual dividends allowance. Be aware that this allowance is not means tested).
- Transfer your personal allowance to your partner
The marriage allowance permits a couple to transfer 10% of one of their personal allowance to the other, so long as they both pay the basic rate tax. By doing so a couple has the possibility of saving up to £252 per year, and can be done online through HMRC.
- Ensure you’ve used your ISA allowances
ISAs allow your income to increase tax-free. Whether you choose to invest in stocks and shares or cash ISAs, you’re able to invest a total of £20,000 for the tax year 2021/22, and £9,000 for a junior ISA.
How can SG Accounting help?
Here at SG one of our main goals is to ensure your money works as hard as it possibly can, so that you take home as much of your contractor pay as possible whilst keeping the taxman happy. With our expertise in the specialist and often complex issues Limited Company contractors can face, we ensure our clients are getting what they need and deserve from their income, along with professional advice on how to achieve your personal and professional goals. Get in touch today to find out more.
Note: All the information and advice in this blog post was correct at the time of writing.
