It’s a question we get asked a lot by our creative industry clients: how can we keep our tax bills down?
Well, there are certainly ways and means of reducing your company’s tax liability – and as Chartered Certified Accountants, it’s our job to help you find them. But a lot has changed in the last couple of years, and the government has had to introduce a tonne of new laws and thresholds to address the national deficit, not to mention deal with the cost-of-living crisis.
Some of the tax revisions that have been introduced for 2022 and beyond will result in higher charges for many UK companies. So, if you want to run your business as tax efficiently as you can, you’ll need to understand what the rules are, which rates apply to your circumstances, and how you can make the most of any allowances that are available to you.
Here, we’ve set out some of the key personal and corporation tax changes coming into play from 6th April 2022 that will affect your tax planning for the year(s) ahead – and added some general advice to help you reduce your tax bills.
Which new rates and thresholds apply for the 2022/23 period?
There are lots of things to navigate as we move into the new financial year.
However, with a little thought and pre-planning, you can make the most of the allowances available to you and keep your personal tax liabilities low. Here are 6 things to bear in mind when you’re looking at ways to minimise your personal and company taxes in 2022/23.
1. Use optimum salary levels to reduce tax
As a company director, it’s up to you how much salary you want to earn from your business. Here’s what you should bear in mind when looking at the numbers.
- If you are the sole Director employed within your company:
You can take a salary of up to £9,100 per year (£758.33/month) without having to pay any National Insurance contributions (NICs).
- If you have two or more Directors employed within your company:
You can take an efficient salary of £11,908 overall in 2022/23 (£992.33/month). Two or more Directors can take an annual salary up to the primary threshold with no employee NI due. The primary threshold increases mid-year (from 6th July 2022) from £9,880 to £12,570.
The company can claim the £5,000 Employment Allowance to cover the portion of employer’s NI they would otherwise incur. The Employment Allowance for the period 2022/2023 has risen from £4,000 to £5,000 – so, if you’re eligible, you can claim up to £5,000 off your national insurance liability per year.
NICs are now charged at an extra 1.25% compared to last year. This is to support the UK government’s plans to raise funds for increased NHS and social care spending. There’s not a lot anybody can do about this – but the (slightly) good news is, the threshold at which employees start paying NICs has now risen to £12,570, so at least it’s in line with the personal allowance.
REMEMBER: Wages are treated as business expenditure, so you’ll be eligible for corporation tax relief on your salary (or salaries). More on corporation tax later!
2. Consider the current income tax thresholds
If you have the funds to do so, you’ll probably want to take dividends alongside your salary. When considering how much to draw from your company, you should think about how your personal allowance AND the current income tax thresholds might affect your overall tax liability.
In 2021, the government decided to freeze current allowances and thresholds until 2026. So, they will remain the same as they were last year, which is as follows:
Tax-free personal allowance: Up to £12,570 of total income.
Basic rate tax: You will be taxed 20% on further income up to £50,270.
Higher rate tax: You will be taxed 40% on further income up to £150,000.
Additional rate tax: You will be taxed 45% on further income above £150,000.
TOP TIP: Avoid paying higher or additional rate tax by making sure your combined takings from salary and dividends equal no more than £50,270.
This means that, if you’re on a salary of £9,100 per year as a sole employee of your limited company, you’ll be able to take an additional £41,170 per year in dividends between April 6th 2022 and April 5th 2023 without going into the higher rate tax band.
3. Get to grips with dividend tax
Taxes on dividends will be rising by 1.25% in the 2022/23 financial year. Here’s how the rates have changed:
Basic rate: was 7.5%, now 8.75%
Higher rate: was 32.5%, now 33.75%
Additional rate: was 38.1%, now 39.35%
The rate at which you pay tax on your dividends above your dividends allowance will depend on which income tax band you fall into. The current dividends allowance is £2,000, which means any drawings up to this amount will be tax-free.
You’ll need to bear all these figures in mind when choosing how much dividends you take, and when.
4. Take active steps to avoid high tax
If there’s ‘spare’ cash in your company, you might want to consider placing money into a pension instead of drawing dividends. This will lower your taxable income and help you avoid hefty tax bills. It’s a particularly attractive option for directors who are over 55 and wish to increase their pension contributions as they get closer to retirement age.
To make tax savings at the highest rate of tax, you can contribute 100% of your salary, or up to £40,000, whichever is lower. Your company will also receive corporation tax relief on contributions that come straight from your limited company.
Otherwise, you can place any saved money into shares, bonds, property, and other eligible investments instead of drawing it out as dividends. However, doing so may affect your company’s trading status. And, as we all know, investments can go down as well as up, so there is a certain element of risk associated with this approach. We would recommend speaking to us first before making any decisions!
5. Spend more to lower your corporation tax bill
Corporation tax will be frozen at 19% for the year 2022/23. The headline rate will be increasing to 25% from April 2023 – but certain measures will come into place to reduce the squeeze on smaller organisations. For example, companies with profits less than £50,000 will still only need to pay 19%, with a tapered increase to the new rate of 25% as their profit increases.
To make sure you’re not paying more corporation tax than you need to, you should always be keeping on top of your allowable deductions and expenses. But as the corporation tax rate is set to go up, claiming for correct capital allowances on business assets will become even more crucial.
Make sure you’re recording every expense – however small it may seem. From travel costs to work lunches, monies spent on work-related activities and/or items exclusively for business use can be used to reduce your profits and therefore keep your corporation tax bill to a minimum.
TOP TIP: Pension contributions and professional insurance payments count as expenses, too!
6. Manage your VAT claims – and look into other VAT options
If your company is VAT registered, you need to reclaim back VAT on any VAT-able purchases made by your company. If you don’t, you’ll be paying a much higher VAT bill than necessary. You can learn more about making VAT claims in our recent blog.
You also may save time and money by registering for the VAT Flat Rate Scheme. This isn’t the right option for every organisation, but it can really help to simplify the VAT return process by taking a lot of the paperwork out of the equation.
To be eligible for the Flat Rate Scheme, you will need to be VAT registered and have a predicted annual turnover of less than £150,000. You won’t be able to sign up if you have left the scheme within the last 12 months; committed a VAT offence within the past year; or are too closely associated with another business.
Everything we’ve mentioned here is just the tip of the iceberg when it comes to the rule changes that are taking place as of April 2022. New regulations and allowances are set to significantly shake up the UK economy – at least in the short and medium-term – which is why it’s so important to look at all your options and learn how to make more tax-efficient decisions in the coming months.
Or, you could just jump aboard with AO Accountants, and we’ll do all the hard work for you!
We can handle everything, from forward tax planning to running your calculations and completing your returns. Find out more about our services here, or contact us today to see if we’re the right fit for your creative agency.