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Everything you need to know for the new tax year 2021/22

For those who are self-employed or who run their own business, you are so busy “doing the doing”, there is little time to research the ever-shifting tax tables or myriad of changes announced in the budget. We pull together all the research you need to plan for the new tax year 2021/22.

Financial planning for businesses

Proactive tax planning is better for your health

Are you doing everything a bit backward when it comes to managing the tax year? Most people tend to rush around at the end of the tax year trying to ensure they make the most of tax efficiencies, such as utilising tax allowances.

Actually, it is the start of a new tax year that is the best time to maximise tax efficiency. Not only does it make tax year end a lot less stressful but you get benefit all year around.

For those of us who are self-employed or who run our own business, we are so busy “doing the doing”, there is little time to research the ever-shifting tax tables or myriad of changes announced in the budget. So here we pull together all the research in to one neat package to give you some clear ideas you can utilise or adapt to your own finances.

One thing is for sure, just like running your business, you can’t do everything yourself. If you want some help taking a more proactive approach to managing your finances get in touch with one of our financial planners.

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How to structure tax effective earnings

If you are a shareholder you will earn dividend income each year, of which £2,000 isn’t taxed. This is known as the dividend tax-free allowance. You also do not pay tax on any dividend income that falls within your personal allowance. For 2021/22 this has increased from £12,500 to £12,570. After that there are three tax rates in which dividend income will fall in to:

  1. Basic rate: 7.5% for dividend income up to £37,700
  2. Higher rate: 32.5% on dividend income above the basic rate up to £150,000
  3. Additional rate: 38.1% on dividend income above £150,000

 

The goal should be to utilise your tax-free allowances to ensure your remuneration is as tax efficient as possible.  Tax on dividends is lower than PAYE income. You can access details of all income tax thresholds and rates in our 2021/22 tax tables. Tax calculators, for example a dividend tax calculator, are also useful so you can work out roughly how much tax you will pay.  Any dividends you take from company profits should be issued before 5th April 2022, if you want them included in your personal self-assessment with HMRC for the 2021/22 year.

 

Pro Tip: Most business owners will look to take a salary of £8,840, which is the 2021/22 National Insurance secondary threshold. This means you have a remaining personal allowance to utilise of £3,730 and £2,000 tax-free dividend allowance so in total you can take £5,730 in dividends tax free. This makes a total tax-free income of £14, 570. When you take additional dividend income you will be taxed.

You could be utilising Pension Tax Relief

People who are self-employed or own a business often forget to utilise pensions. This stems from a tendency to assume your business is your “retirement fund” and all that you need, but in reality you need more wealth channels than relying solely on the capital built up in your business.

Firstly, pensions are a tax efficient way of saving. For business owners, a pension is also a way of drawing capital out of the business tax efficiently. More importantly though, the value of your company is not set in stone, it is only worth what someone is willing to pay for it. If the capital you receive from a business sale falls short of what you need to retire comfortably on, having additional sources of retirement income could make up the difference. Ultimately, having your wealth split across different areas, such as your business, a pension, investments, equity in a house etc spreads risk and often increases your tax efficiency.

Pension contributions for the year need to be made by 5th April 2022. Sole traders can pay directly into their pension. If you run a limited company, you can pay into your pension through your monthly payroll or make lump sum contributions throughout the year. For 2021/2022, individuals have an annual pension allowance of £40,000 but more might be available if you have not used previous years allowances.

When it comes to pensions the government gives tax relief. If you are a basic rate taxpayer this will be 20%, which is added to your contributions by your pension provider. If you are an additional or higher rate taxpayer, you can claim your additional or higher rate tax relief back through your self-assessment tax return. Not many people know about a carry forward rule either. Over the last three years if you have not used your full £40,000 allowances you can carry these forward and make additional contributions over the pension tax free amount. In simple monetary terms what this means is that if you were topping up your pension with £1,000, it would cost a basic rate taxpayer £800 and higher rate taxpayer £600 after tax relief. If you aren’t utilising pensions as a way to save, why not find out more about business retirement planning.

Reap the tax benefits from ISAs

We all save for important reasons and if you utilise putting money into an Individual Savings Account (ISA), when it comes to needing or using those savings you will reap the tax benefits. Everyone has an ISA allowance each year. Unchanged for the new tax year, you can save up to £20,000 into various types of ISAs:

 

If you get to the end of the tax year and you have not utilised your ISA allowance you cannot carry forward the allowance and it will be lost, which is why people who are savvy money managers will save throughout the year.

There is a big difference between saving and investing. Money stuck in a bank account could be losing value, if you are looking to save for the long-term it could be time to think about investing, check out our easy-to-read complete Guide to Investing. It is free to download and no we do not even ask you to part with your contact details!

Read our Ultimate Guide to Investing

How can I save additional tax?

If you get organised throughout the year, every month you can put aside part of your income for your tax bill. This means you have a pot of money sitting in a bank for months, because the payment deadline isn’t until the following January.  If it suits your personal circumstances and you have utilised your tax-free savings allowances, you could use this pot of money to mitigate all or some of your tax owed by investing in an Enterprise Investment Scheme (EIS). Enterprise-investment schemes were introduced by the government in 1994 to help small companies raise funds and grow. These investments are risky so the government grants investors a mix of tax relief benefits:

1. Up to 30% income tax relief

2. Inheritance tax relief

3. Tax-free growth

4. Capital gains deferral

5. Loss relief

As soon as the shares in the EIS have been allotted and you receive your EIS3 certificate, you can claim tax relief via your tax return in January which will reduce the amount of tax you owe to HMRC or mitigate it all together. On top of tax relief, you may also receive returns in the form of capital growth. Often there are estimated targets of what an EIS should return, varying up to 10x the money invested, relative to the risk level.

There are carry-back rules to consider, limits on how much you can invest to get tax relief and Enterprise Investment Schemes (EIS) invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.  Therefore, it is imperative if you have never used a financial adviser that you consider doing so because this type of investment could impact on your overall financial plan and objectives. Ultimately, Unividual has the knowledge and experience to  consider whether an EIS is suitable before recommending the investment.

Speak to an EIS specialist

A summary of key changes for businesses in the new tax year:

  • Personal allowance: this increases to £12,570, so you will pay slightly less tax. However, this will be frozen until 2026.
  • Minimum wage increase: New minimum wage rates come into force in England on 1st April. The National Living Wage is increasing to £8.91 an hour and it will now apply to people aged 23 years and over instead of workers over 25.
  • Paternity pay: Maternity, paternity, adoption and shared parental pay is increasing to £151.97 a week.
  • Sick pay: Statutory Sick Pay (SSP) rates are increasing to £96.35 a week. Note that SMEs with fewer than 250 employees will get a full refund from the government of 14 days statutory sick pay if staff are off sick with COVID 19.
  • IR35: Changes to rules in the private sector could impact on the self-employed and contractors working through their own limited company. The rules apply to all public and private sector clients/companies that meet 2 or more conditions of either an annual turnover over £10.2 million, a balance sheet total over £5.1 million or more than 50 employees. If you fit in this category take a look at the IR35 changing rules in more detail.
  • NICs: The Primary Threshold for Class 1 National Insurance Contributions rises to £9,568.
  • Frozen allowances: It is worth nothing that some tax thresholds/allowances are set to be frozen until April 2026: Inheritance tax thresholds, pensions lifetime allowance and capital gains tax annual exempt amounts.
  • VAT: The hospitality, hotel and holiday accommodation sector will continue to get a 5% VAT reduction until the end of September, with a gradual increase back to the standard rate by April 2022

Utilising business grants and government support

  • Furlough: The scheme is extended until September 30th 2021, however from July employers will be asked to contribute an extra 10% and an extra 20% in August until the scheme is phased out.
  • Restart Grants: If your business is in leisure or retail, get in touch with your local authority to enquire about restart grants, a one-off cash grant, up to £18,000, to pubs, clubs, hotels, restaurants, gyms and salons. Non-essential retail businesses can get up to £6,000.
  • Business rates: The business rates holiday for leisure and retail will be extended until June 2021, after which rates will be discounted for the rest of the tax year. From 1st July 2021 to March 2022 there will be a 66% reduction up to a maximum of £2m for closed businesses.
  • Corporation tax: Apply for a three month extension to companies house for filling out your accounts and you won’t get a late payment penalty. HMRC also has a Time To Pay service for businesses who are struggling to pay outstanding tax bills.
  • New recovery loan: businesses can apply for a bank loan, between £25,000 to £10m and the government gives lenders an 80% guarantee. It launches on 6th April and will run to the end of the year.

Where do you start with it all?

Planning in advance for the new tax year isn’t easy. There are so many dates, allowances, rules and timings. It requires organisation, research to keep knowledge up to date, accountability and learning from mistakes and experiences. If you are self-employed or running a business, you probably struggle to find the time to eat let alone create a solid financial plan for yourself. Take a second to think about your purpose and why you work so hard? Perhaps it is to leave a legacy to your children and grandchildren? You might want to retire early? Be able to holiday where you like? Have the money to make a difference to the world in a unique way.  Just like having an accountant, solicitor, or electrician…if you don’t have the skill, experience or time to do it yourself financial planning could be the difference between you achieving those dreams or not. Don’t do what everyone does…not get in touch because they think financial planning is for “rich people”, they are too young, haven’t got the time, or even worse do not think they deserve the support of a qualified professional. It is never too late to start, so, when you are ready, we are ready.

Speak to a financial adviser today

 

Article Date: 07/04/2021

Author: Greg Harris

Editor: Cherie-Anne Baxter

 

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