As the 2021/22 tax year comes to a close, here are some important income tax spring cleaning ideas to consider before 5 April.
1) Pension contributions
Each £8 of taxed income paid into a self invested personal pension plan will save a higher rate taxpayer £2 (25%) of tax. If you are the highest earning parent with income of around £60,000 and claim child benefit for three children, the benefits from the reduction to the Higher Income Child Benefit Charge are much higher. You will save around 57.5% of your post tax pension contributions if you are earning exactly £60,000.
In addition, HMRC add £2 out out of every £10 invested to your pension pot for you to invest for your retirement.
You should however be aware that pension income (apart from a 25% lump sum) is taxable when withdrawn from the scheme. This makes case for pension contributions for basic rate payers marginal at best.
There are complex annual limits to the amount of annual pension savings you can make in any one tax year: -
Generally the limit is £40,000 of pre-tax income per year (£32,000 post tax) in the 2021/22 tax year.
This allowance is reduced by £1 for every £2 your total remuneration (including pension contributions) exceeds £240,000, down to a minimum of £4,000 in the 2021/22 tax year.
Any unused allowance from the past three tax years can be carried forwards and used in the current tax year.
Defined benefit schemes common in the public sector have specific rules for measuring the "pension input amount" for tax purposes. This has no relation with the cash amount paid into the scheme.
2) Charity
Each £8 of taxed income donated through the Gift Aid scheme will save a higher rate taxpayer £2 (25%) of tax. Again, if you are earning around £60,000 and claim child benefit, the benefits are much higher.
In addition, HMRC add £2 to your donation to the charity.
There is no limit on the amount which can be gifted to charity.
3) Dividends
Each tax year every tax payer can earn £2,000 of dividends at a zero rate of tax (note however that this does count as taxable income for the purpose of child benefit.) In addition, tax rates on dividends rise by 1.25% from 6 April 2022 so it may be worthwhile to draw more this year.
The timing of the tax point of dividends is important
Dividends proposed by directors are taxed when paid.
Dividends voted on by shareholders are taxed when voted upon.
Dividends drawn in excess of profits available in a company for the purpose are (a) illegal under company law (b) accounted for as a loan (c) give rise to a taxable benefit in kind with 13.8% national insurance payable by the company and income tax by the director, on the deemed benefit in kind arising from a loan and (d) give rise to a large "section 455" tax charge on overdrawn loan accounts which will be repaid when the loan account is repaid.
It is therefore always advisable to leave enough money in the bank to cover the corporation tax, VAT, PAYE, and other creditors due.
For a quick chat about how you can optimise your tax this year, drop us a line: hello@1gaccounts.uk
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