2022 Tax Year End Planning
April 2022 is the first in a series of important annual April tax changes:
- April 2022 - increase in national insurance and dividend tax by 1.25%
- April 2023 - increase in corporation tax from 19% to 19%/26.5%/25%
- April 2024 - MTD for income tax for sole traders and landlords with sales/rents over £10k
- April 2025 - MTD for partnerships and LLPs without a corporate partner
For now, we're focussing on the forthcoming April 2022 change and how you may want to react. Firstly, let's look at how much this might cost you:
Sole shareholder-director - basic rate taxpayers
If you're a sole shareholder-director without any other income, you may be taking an annual salary of £8,832 and dividends of £41,168. This keeps you within the basic rate tax band and helps you keep your child benefit. If so, your personal tax bill for this tax year ended 5 April 2022 is £2,657.
For the next tax year ended 5 April 2023, your tax bill will increase by £444 because £35,500 of your income will be taxed at 8.75%, an increase of 1.25% on the current 7.5%.
Two shareholder-directors - basic rate taxpayers
Often, two shareholder-directors each take an annual salary of £12,564 to benefit from saving more corporation tax taking advantage of the £4,000 employment annual allowance. Assuming your total income stays under £50,000, your personal tax bill will also increase by £444 each.
Both these examples change slightly where the full £50,270 basic rate band is utilised and account is taken of the increase in national insurance thresholds.
Higher rate taxpayers
Where your total income is over £50,270 your dividend tax increases from 32.5% to 33.75%, that is, for every £10,000 of dividend the increase is £125. Where dividends are taken up to £100k to retain your £12,570 tax free personal allowance, your higher rate income tax of £16,162 will increase by £622 to £16,784.
When added to the increase in the basic rate tax band of £444, the total tax increase is over £1k.
What could I do to save tax of between £400 to £1k?
Pay more dividends before 5 April 2022 - You might decide to take a few more dividends before 5 April 2022, taking fewer from 6 April 2022, than you normally would.
Consider adding your spouse as a shareholder - Depending on your relative incomes, you may save dividend tax from spreading out dividends between you.
Are there other ways to be more tax efficient?
To help offset this forthcoming tax increase, you might decide to replace existing dividends with:
- A new electric car
- Employer pension contributions
- Life cover premiums
- A commercial home office rent
- An annual health care check
- Smaller items such as an annual party and trivial benefits
Where you have staff, you'll pay more employer's national insurance, an increase from 13.8% to 15.05%. Employing apprentices or veterans saves employer's national insurance, providing more of an incentive to employ these favoured groups.
What about sole traders and partnerships?
Where you have profits over £9,880, you'll pay 10.25% Class 4 national insurance from April 2022 rather than 9%. As the threshold has increased this saves a small amount, £28, on the previous year, but aside from this for £10,000 of profit over £9,880, your national insurance bill will increase by £125.
If you're planning to invest in plant and equipment or a vehicle you might want to do this from 6 April 2022, to save 10.25% rather than 9% of Class 4 national insurance.
Please discuss the details with us to ensure your plans can be carried out in good time. Thank you.