I recently ran a webinar giving my top tax saving tips for individuals, companies, landlords, the self-employed and contractors. In this webinar there are loads or ideas on how to save money on your tax bill. This blog covers the best way to use the multitude of tax allowances on offer and how to maximise your tax allowances and save tax.
All individuals in the UK are entitled to a personal allowance of £12,570 for 2021/22. So, any income you receive up to this amount will normally be tax-free but the amount will incur both employee and employer’s National Insurance (NI).
Or else you can pay yourself £9,568 up to the NI threshold. There will be some employer’s NI payable.
Personal allowance creates significant opportunities in terms of making tax efficient salary payments to other family members. The salary must be reasonable, and the person should be providing service to the company or else it will fail the wholly and exclusively test and HMRC will disallow the expense for tax purposes.
Spouses can transfer 10% of their personal allowance to the other spouse. So, if one of them earning is earning less than £11,310, it will be beneficial to make an election to transfer the allowance. This will result in a savings of £252. To qualify both of you should be basic rate taxpayers. You can backdate your claim to include any tax year after 5 April 2017 that you were eligible for Marriage Allowance.
Personal savings allowance
Personal savings allowance means basic rate taxpayer can receive £1,000 interest tax-free and higher rate taxpayers can receive £500.
The starting NIL rate for savings of £5,000 and personal allowance means that if you have investment income only, it could be exempt.
For the starting rate of savings to apply the taxable non-savings like employment and self-employment income should be less than £17,570.
Individual Savings Account (ISA)
If you are investing in stocks, bonds, unit trusts or simply put money into bank for earning interest, you could explore an ISA account. Any income/capital gains earned in ISA account are exempt from tax. The annual limit of investment is £20,000 per tax year, so for 2021/22 you will have to invest by 5 April 2022, or the allowance is lost.
If you have children, you can open a Junior ISA account and invest up to £9,000 every year.
Donations to charity
If you make donations to charities, the charity can claim gift aid relief on the donation. If you are a higher rate or additional rate taxpayer, you can claim further relief in your self-assessment or by informing HMRC to change your tax code. You can make an election to carry back the donations to the previous year.
Tax-free childcare scheme
The scheme offers up to £2,000 per child towards childcare costs, nursery, childminder. For every £80 you pay the government pays £20. Self-employed and employed people are eligible subject to conditions.
Gifting shares in a company
You can gift shares in the company to your spouse or civil partner. The gift will be at no gain/no loss provided you are living together in the year of the gift. With the £2,000 dividend allowance, this will be effective in splitting the tax bill on dividends between you.
The shares should be an outright gift and shouldn’t be wholly or substantially a right to income or else settlement legislation could apply where the dividends could be taxed on you.
From 2017/18 a property allowance of £1,000 per tax year is available to individuals in respect of certain property income. This was mainly to support income from Airbnb or renting out a garage.
If you are letting out a room to a tenant in your home, a special relief is available called rent a room relief. This means if the gross receipt is £7,500 or less the relief will apply automatically. Please note, the rent a room relief applies per property and not per tenant.
Sale of assets / Capital Gains Tax (CGT)
For capital gains, you have a separate annual exempt amount of £12,300. So, if you are selling assets like shares, properties etc. the gains of first £12,300 will be exempt from tax.
Inheritance tax (IHT)
For IHT purposes if you gift assets and survive for 7 years, your estate does not pay inheritance tax on these assets. But if the donor dies within 7 years of gifting the assets, it will fall under their estate and will use the NIL rate band. There are some gifts that fall under annual exempt amount and are exempt from IHT, example a small gift of £250 per person, annual exemption of £3,000 and you can use the allowance from previous year.
If you are non-domiciled and have £2,000 or less income and gains, and provided they are not remitted to UK, there is no reporting requirements. This is not an allowance or exemption, if you have more than £2,000 earnings you are required to disclose this to HMRC. Under Common Reporting Standards (CRS) HMRC is receiving a lot of information on individual bank accounts and have started issuing offshore disclosure letters. It is advisable you review your position.
This blog just covers the use of your allowances to minimise your tax bill. For more great tips on tax saving in 2022, why not listen to the full Top tax saving tips for 2022 webinar.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
Stay up-to-date with the latest news affecting small businesses, get business tips and tax saving advice.