SG’s 7 top tips for Limited Company contractors to reduce your income tax bill in 2022
The tax year is now in full swing and whilst you currently might not be considering tax, it’s still a good idea to understand it’s importance, and how making it work in your favour could ultimately mean more money in your pocket.
In this blog we explore the top 7 things you can be doing to reduce your income tax bill in 2022, and maximise your contractor take home pay.
- Make pension contributions
Personal pension contributions are made from taxed money, so whilst as a taxpayer you’d put in X net amount (for example 80% if you’re a basic rate tax payer, 60% if you’re a higher-rate tax payer, and 55% if you’re an additional-rate taxpayer), HMRC will contribute the tax paid on that contribution, directly into your pension scheme. The entire amount is therefore invested tax-free, so for example for a basic-rate taxpayer you pay £80 in yourself, and HMRC will top it up with £20. The investment will then grow without income tax and Capital Gains Tax. If you’re a UK resident that’s under 75 who’s currently not receiving your pension, then you’re able to contribute a maximum of £40,000 pa from your earnings, and still receive this tax relief. If you have a spouse ensure they’re doing the same and making the most from this allowance.
- Make pension contributions on behalf of your partner
The amount you can contribute depends on the circumstances of the pension owner, not the person who is making contributions. The amount that someone can pay into their pension(s) every year is either £40,000 or 100% of their earnings, whichever is lower.
Even if you don’t earn, you can contribute up to £2,880 per year to a pension and still get tax relief at the basic rate. This even applies to children. Much like a Junior ISA, parents and legal guardians may set up a pension for a child, which will pass to them when they are 18. Once set up, anyone can make contributions up to a total of £2,880 per year for a child, boosted to £3,600 gross. Although it may seem like extreme forward planning, the tax-relief added to the compound interest built up over time make it an excellent way to save for your child’s or grandchild’s future.
- Ensure you’ve used all of your pension annual allowance
You’re able to carry over any unused pension annual allowance for the past three years, so it’s worth taking a look to make sure you’ve not got any outstanding allowance from 2019 onwards. The pension scheme must have been in place during those years, to qualify.
- Make a financial gift to charity
Gifts given to UK registered charities are exempt from income tax, so long as you sign a gift aid declaration when making the donation. For example, if you gave £80 of taxed money to a charity, HMRC will pay the additional 20%, so the charity would in fact receive £100. If you’re a higher or additional-rate tax payer then the tax bands are extended, respectively.
- Transfer investments to your partner
It’s advisable to revise any investments you may have annually, to ensure they’re in the best proportion for tax purposes, should you share them with your spouse. If the funds you have are generating interest, and your spouse does not receive income from employment, trading or property lettings that exceeds £17,570 in 2022/23, then the first £6,000 of the received amount will be tax-free.
If your spouse does have non-savings earnings that exceed this amount, basic-rate tax payers should earn a minimum of £1,000 interest, and for higher-rate tax payers it’s £500 to be able to take advantage of the personal savings allowance. If the investment income generates dividends, then each spouse should hold enough capital to generate dividends of £2,000 (which is the annual dividends allowance – but be aware that this allowance is not means tested).
- Transfer your personal allowance to your partner
If you’re married, the marriage allowance permits you to transfer 10% of your personal allowance to your partner, and vice versa, so long as you’re both paying the basic-rate tax amount. This process allows you to save a possible £252 pa, which can be done online through HMRC.
- Ensure you’ve used all of your ISA allowances
ISAs are a fantastic way of increasing your income tax-free. Whether it’s stocks and shares you invest in, or cash ISAs, you have a limit of £20,000 for the tax year 2022/23, and £9,000 for a junior ISA.
How your SG Accountant can help you
One of our main goals as your trusted contractor accountant is to ensure your money is working as hard as it can for you, in the most tax efficient way possible. Our expertise in the complex and sometimes demanding issues Limited Company contractors face mean that it’s our job to ensure you receive the right advice and support you need, in order to maximise your take home pay. Get in touch with your SG Accountant to discuss any points raised in this blog.
Note: All the information and advice in this blog post was correct at the time of writing.
