Aardvark Accounting’s top 7 tips to reduce your income tax bill in 2022 as a Limited Company contractor
We’re fast approaching the middle of 2022 and the tax year is now in full swing, so now is the best time to take stock of your allowances, and how making them work for you could mean more money in your pocket at the end of the day. So what do you need to be aware of?
In this blog we explore the top 7 ways in which you can make the greatest impact on your income tax bill this year, and ultimately maximise your take home pay.
- Make pension contributions
Personal pension contributions are made from money that has already been taxed, so as a taxpayer you put in the net amount you wish (eg – 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 tax payer), HMRC will pay the tax paid directly on your contribution into your preferred pension scheme. The total amount is then invested tax-free, so if you were a basic-rate taxpayer and paid £80 in, HMRC would ‘top it up’ with £20 to make a total £100. The investment then grows without income tax or Capital Gains Tax.
If you’re a UK resident aged under 75 and not currently receiving your pension, then you’re able to contribute a maximum of £40,000 per annum from your earnings, and still be eligible to receive this tax relief. If you have a spouse ensure they’re doing the same so that they’re making the full use of their allowance.
- Make pension contributions on behalf of your partner
The amount you’re able to contribute depends on the pension owner’s circumstances, not the person who is making the contributions. You’re either able to pay up to a maximum of £40,000 or 100% of your earnings each year, whichever is lower.
Even if you’re not earning, you’re still able to contribute up to £2,880 per year into your pension and still get tax relief at the basic rate.
- Make sure you’ve used all of your annual allowance up
You have up to three years to carry over any unused pension annual allowance, so make sure you take a look to see if there’s any outstanding allowance from 2019 onwards. In order to qualify, the pension scheme much have been in place during this time.
- Make a financial gift to charity
Gifts that you give to a UK registered charity are exempt from income tax, so long as you sign a gift aid declaration when making the donation. For example, if you’re a basic-rate taxpayer and you make a donation of £80, HMRC will pay £20, so the charity will in fact receive £100. If you’re a higher or additional rate taxpayer your rates will be adjusted accordingly.
- Transfer your investments to your partner
You should annually revise your investments to ensure you’re making the most from your allowances.
It’s advisable to speak with a financial advisor annually, to ensure your investments are in the best proportion for tax purposes, if you share them with your spouse. If your investments generate interest, and your spouse isn’t currently earning an income from employment, trading or property lettings that exceed £17,570 in 2022/23, then the first £6,000 of the amount received will be tax-free.
If your spouse does have income exceeding the £17,570 limit, basic-rate tax payers should earn a minimum of £1,000 interest, and higher-rate tax payers should earn £500, in order to take advantage of the personal savings allowance. If dividends are generated as a result of investment income, then each spouse must hold enough capital to generate dividends of £2,000 (which is the annual dividends allowance – but beware that this allowance is not means tested).
- Transfer your personal allowance to your partner
The marriage allowance allows you and your partner to transfer 10% of your personal allowance to one another and vice versa, so long as you’re both paying the basic-rate tax amount. You’re able to save a maximum of £252 per annum, which can be done online through HMRC.
- Make sure you’re used all of your available ISA allowances
ISAs are a great way of increasing your income tax-free. Whether its stocks and shares you invest in, or cash ISAs, you’re able to invest a maximum of £20,000 for the tax year 2022/23, and £9,000 for a junior ISA.
How your Aardvark Accountant can help you
We want to ensure your contractor take home pay is working as hard as it possibly can be, and in the most tax efficient way possible. Our accountants’ expertise in the complex and sometimes confusing world of tax mean that you can focus on contracting, whilst we work away busily in the background, freeing you up to do what you do best. Get in touch with your Aardvark 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.
