Year-end tax planning for small companies

The end of the tax year is approaching, and now is an important time to be thinking about your remuneration strategy and tax planning. You will need to consider appropriate levels of salary, pension contributions and dividends, before the end of the tax year on 5 April 2022, and plan for the new one.

Tax increases from 2022/23 – be aware of the tax bands

The numerous tax changes ahead for small businesses mean that tax planning will become increasingly important over the next few years. One of the key advantages of working through a company is being able to monitor your total income in the tax year and having the flexibility to retain this within a certain band. It is therefore essential to be aware of the bands so that where possible you can minimise paying tax at higher rates or can retain certain benefits and allowances.

The Government has announced that there will be no increase to the current personal tax thresholds or bands until 5 April 2026. This means that the value of these bands will be eroded by inflation over the next 4 years, and you could find your income shifting up into the next band to maintain the same standard of living.

The current bands and tax rates are as follows:

When your total income exceeds £100,000, you will start to lose your tax- free personal allowance by £1 for every £2 of income above this threshold (although charitable donations and pension contributions paid by you personally will reduce income). The effective tax rate on income that falls within this band can be up to 60%. If your total income is above £125,140 you will lose the whole of the personal allowance.

In addition to the freezing of the bands, from 6 April 2022 there will be an increase of 1.25% to employee NI, employer NI and dividend tax. Therefore, when considering how much to extract this tax year, you may wish to consider paying yourself slightly more than you need so that you can draw on these extra funds over the forthcoming years. For instance, you may wish to fully utilise the basic rate band in 2021/22, particularly if this would mean that over next few years it would enable you to retain your income below £50k again.

Note that whilst the additional 1.25% to employee NI will not initially apply to directors who are over state pension age, the rebranded ‘Health & Social Care Levy’ of 1.25% from 6 April 2023 will apply to those who are state pension age.

From 6 April 2022 onwards, if you pay yourself salary above the primary NI threshold of £9,880 there will be an extra 2.5% incurred; 1.25% employee NI and 1.25% employer NI. On dividend income above £2,000 there will also be extra tax of 1.25% payable.

Anyone in receipt of child benefit (or their partner is) should be aware that clawback of the benefit commences once either partner’s income exceeds £50k. If it exceeds £60k then the whole of the benefit is repayable.

Salary in 2021/22

Have you paid any salary this tax year? If not, consider paying yourself the minimum tax efficient salary of £8,840, which is the level up to which no national insurance is payable. In fact, provided you pay yourself salary of at least £6,240 (£6,396 2022/23) you will still qualify for a credit for national insurance, for state pension purposes, therefore where possible you should at least pay yourself this level.

If you claim the employment allowance (see below) then a slightly higher salary can be paid. This will be £12,570 if you have no other income, other than from your company, or £9,568 for 2021/22 (£9,880 2022/23) for those with other income and who are already a basic or higher rate taxpayer.

Once you have paid yourself the minimum salary it is generally more tax efficient to pay yourself dividends because there is no national insurance payable on dividends.

All salary to be included in 2021/22 needs to be reported to HMRC by 5 April 2022. We will be forwarding an email shortly detailing the timetable for making payments prior to the year end. You will need to confirm your salary plans with our Payroll Team so that the correct submissions can be made before the year end deadlines.

If you are in any doubt whether IR35 applies to any of your roles, we would recommend you obtain advice or a contract check from a specialist such as Bauer & Cottrell or Croner Taxwise.

For clients who have worked via their company, on contracts deemed to be within IR35, tax and national insurance will, in most cases, have been deducted at source. Please ensure your accountant or the Payroll Team are aware that you have received funds in this way during 2021/22.

For 2022/23 the tax efficient salary will generally be £9,100, or £758.33 per month, which is the level up to which no national insurance is payable.

Dividends – make use of the £2,000 dividend allowance

In 2021/22, the first £2,000 of dividend income is taxable at 0%, and as far as we are aware this will apply in 2022/23 too. We recommend you take advantage of this allowance, provided you have sufficient distributable reserves available. Please remember that this £2,000 limit includes dividends you receive from any shares and investments you hold, including dividends which are reinvested in new shares, and not just the dividends from your personal service company.

If you have no income from other sources, you may wish to fully utilise the 0% bracket of up to £14,570 (personal allowance £12,570 plus dividend allowance £2,000). If you took a salary of, say £8,840 in 2021/22 then you could withdraw dividends of up to £5,730 and pay no tax.

Dividends are treated as the top slice of taxable income. Once the dividend allowance has been used, if your total income does not exceed £50,270 then your dividends will be taxed at 7.5%, which could be a tax efficient option for you. If your total income is between £50,270 and £150,000, the dividends falling within this band will be taxed at 32.5%. If your total income exceeds £150,000 dividends falling above this threshold will be taxed at 38.1%.

From 2022/23 onwards the dividend tax rates will be increasing to 8.75%, 33.75% and 39.35% respectively.

If your income other than dividends is approaching £100k, any dividend paid (even £2,000) will increase your total income and could mean you lose some of your personal allowance.

As dividends are paid out of taxed profits, you may wish to set aside a cash provision in the company bank account equal to approximately 24% of the dividend paid, to settle future corporation tax.

Any dividend should be paid from the company by 5 April 2022 to fall into the 2021/22 tax year. It is possible to declare a final dividend for the year, and arrange payment on a later date, but this should be formally approved by the shareholders before the end of the tax year.

Salary to spouse or children

Provided you can demonstrate that the family member is genuinely carrying out work for the business, you could consider paying them a small salary. You would need to be clear about the working hours, rate of pay and duties to be performed. Whilst the minimum wage does not apply to children who live with you, this rate nevertheless serves as a good guide for the rate you might wish to pay. For children under 16, you should be mindful that there are the restrictions placed on the number of hours they are allowed to work each week. For employees under 21, no employer NI is payable, saving a potential 13.8% (15.05% 2022/23).  For under 16’s no employee NI or employer NI is payable –saving 27.6% (30.1% 2022/23).

Employment allowance – have you paid employers NI?

If your company pays at least 2 employees or directors a salary above the secondary threshold, of £8,840 in 2021/22 and £9,100 in 2022/23, then you could be entitled to relief for employers NI of up to £4,000 per year. There are conditions, the main one being that not more than 50% of the work you do should be in the public sector. Please contact our Payroll Team if you would like further details about how to make a claim.

Note that you can backdate a claim for the previous 4 tax years, so if you paid salary to 2 or more people (including yourself) over the last 4 years, and think you paid employers NI but did not make a claim, please get in touch with us.

Pension contributions

Pension contributions paid directly by your company into a personal pension plan are allowable as a deduction for corporation tax purposes, but there are limits. You should consult with an Independent Financial Advisor (IFA) as we are not authorised to give advice on this. Whilst we do not recommend a particular IFA, we can provide you with details of a firm that some of our clients have used if required.

Have you paid yourself trivial benefits this tax year?

This is small allowance but nevertheless having the company pay for some wine, clothes or maybe a haircut for you, and this being treated as a tax-deductible expense, sounds attractive? Plus, for higher rate taxpayers it could save you tax and NI of £167 pa (£175 2022/23).

You just need to make sure you stay within the rules which, for a close company, are:

  • Maximum of all such benefits per tax year is £300 per director/employee.
  • Each benefit must cost no more than £50 (including VAT)
  • The benefit must not be cash or exchangeable for cash
  • Must not be a reward for services or in any way obligatory.

For further small tax saving tips see our handout attached

Short term loans from the company

If you need additional funds towards the end of the tax year, but don’t want your total income to slip into the next tax band, you could consider taking a short loan from the company. This could save you paying tax at a higher rate and may be particularly useful if you anticipate your drawings in the following tax year to be lower.

Provided you do not owe the company more than £10k at any point during the tax year, no benefit in kind will arise. If you take more than £10k you have the option to pay the company interest at a level at least equivalent to the official rate (currently 2%) to avoid any benefit in kind arising. If the loan is repaid within 9 months of the end of the accounting year, no further tax charge will arise.

Any loans taken up to 5 April 2022 which are not repaid within 9 months of the accounting yearend will be taxed at 32.5% (this will be extra corporation tax due). Any such loans taken from 6 April 2022 onwards will be subject to tax at 33.75%.

Capital expenditure

Capital assets used in the business, like computers, laptops, and office furniture, will generally qualify for capital allowances of 100% meaning that the full cost is an allowable deduction against profits in the year of purchase. Any such assets which are brand new and purchased between 1 April 2021 and 31 March 2023 will qualify for the new super-deduction of 130% (cars are excluded). For an asset cost of £1,000 this will currently provide an additional tax saving of £57. This may be a small but nevertheless something to be aware of in terms of timing of the expenditure.

Closures and Capital Gains Tax – potential changes

Over the last few years there were rumours that significant changes would be made to Capital Gains Tax (CGT), but so far nothing material has been altered. It is still thought that at some point some aspects will change, and that Entrepreneurs’ Relief (ER) could be withdrawn or reduced.  ER reduces the CGT payable on gains on closure for higher rate taxpayers from 20% to 10%. In view of this if you are thinking of closing, and have significant reserves built up in the company, it might be wise to close sooner rather than later.

Corporation tax increases from 1 April 2023

The government has announced that there will increases to the rate of corporation tax that companies will pay on profit. Currently all companies pay a single rate of 19% regardless of whether they are big or small. This is to change from 1 April 2023 and the rate applicable will depend on level of profits arising in the accounting period. For companies whose profits do not exceed £50k the rate will continue to be 19%. For companies whose annual profits exceed £250k the tax rate will increase to 25% and those with profits in the range of £50k and £250k will pay a rate of between 19% and 25%.

There will be tax planning points to consider before and after this change takes places, for example the timing of pension contributions or expenditure. We will provide further detailed guidance in due course.

Year-end personal tax advice

If you would like specific tax advice relating to your income for the 2021/22 financial year end, please contact us as soon as possible to discuss your requirements.

As you will be aware, our personal tax service is separate from our standard accounting service and is chargeable based on the complexity of the work. We will consider your company planning and level of income, to achieve optimum tax efficiency. Our fee would be agreed with you before carrying out any work Please be aware that we are not authorised to recommend any financial service products.

If you are interested in this service, please email Amy who will direct the enquiry to the correct person.

Amy FowlerYear-end tax planning for small companies