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Have you made the most of your 2021/22 tax allowances?

Updated: Jul 3, 2022

Here at GWA Accountancy, we work with our 'Full Accounting' and 'Advanced Accounting' clients as standard, to help them check whether they have made the most of their available tax allowances.


Before the 2021/22 tax year draws to a close, it is worth reviewing your own position as there may still be time to take advantage of some tax allowances which might otherwise be left on the table. Where tax allowances are concerned, it really is a case of 'use them or lose them' and for those who plan in advance, it is possible to use most if not all of these allowances in each tax year.


What tax allowances are available?


Personal Allowance

It may sound obvious, however there are times when some or all of a personal allowance might not get used by individuals, despite having available income sources to draw upon.


Examples include, i) when a sole trader decides to incorporate part-way through a tax year, doesn't have a full year of sole trader profits to report on their tax return with the level of their taxable profits falling below the level of their personal allowance in the year their business incorporated. If the business owner then does not get a payroll scheme set up in sufficient time to draw a salary and/or the company doesn't pay any dividends, then the unused proportion of the business owners personal allowance would be lost for that year.


Tax Tip: If the new owner/Director of the company continues to draw cash without voting a dividend or running it through the payroll as salary, then the company may suffer a hefty, 32.5% tax charge if not repaid.


Worked scenario: A sole trader and basic-rate tax payer, Elsie, incorporates her business from 1st July 2021. For the final sole trader period ending 30th June 2021, £7,000 of taxable profits arise. These profits are reported on the Elsie's 2021/22 tax return. Elsie works a 70 hour week, sometimes more and has not had time to speak to her accountant to plan the best strategy to extract profits from her company.


As Elsie has other available income to tide her over, she uses it to temporarily cover her bills, whilst she carry on getting her current workload and company administration tasks arising from the incorporation under control. As Elsie neither drawn a salary or voted a dividend, unless she does so by 5th April 2022, she will permanently lose out on: 1) using the remaining £5,570 of her 2021/22 personal allowance against salary (i.e. £12,570 personal allowance - £7,000 self-employed income = £5,570 unused personal allowance); AND 2) the £2,000 annual dividend allowance *see 'Dividends' below


Tax Tip: In the example above, had Elsie had drawn £5,570 of salary from her company, not only would it have been tax-free for her personally as illustrated above, but Elsie's company would also have saved corporation tax at 19% (a corporation tax saving of £1,058), as salary is a tax deductible expense for a company.


Dividends

Assuming that Elsie's company is making sufficient profits to be able to pay out dividends, Elsie can also draw dividends from her company, as mentioned in the worked scenario above. If Elsie draws a £2,000 dividend from her company, in addition to the £5,570 salary, BOTH income streams will be tax-free. In effect, Elsie will have maximised the use of her £12,570 personal allowance and her £2,000 dividend allowance for the 2021/22 tax year. It should be mentioned that there will be 19% corporation tax to pay on company profits before the dividend allowance is used up, however, Elsie's company will still save Employer's National Insurance (NI) on the £2,000 of dividends and Elsie will not pay any tax or NI on the dividends either. Elsie is not restricted to a £2,000 dividend limit, however any additional dividends she receives during 2021/22 will be subject to 7.5% tax assuming that she is a basic rate tax payer.


Tax Note: Note that the basic rate dividend tax rate will increase by 1.25% from 6th April 2022 to support the NHS, health and social care. For all 2021/22 income tax band rates for dividends see https://www.gov.uk/tax-on-dividends and from 6th April 2022 you can find the relevant rates here https://www.gov.uk/government/publications/increase-of-the-rates-of-income-tax-applicable-to-dividend-income


Other Allowances

Capital Gains Tax Exemption

So far we have considered maximising usage of an individual's personal allowance and also how a further £2,000 of tax-free income could be taken by the same individual, if they were a shareholder of their own limited company.


Using our example of Elsie, if she also held an investment portfolio of shares, she might also wish to consider disposing of any shares that she is thinking of selling in the current tax year.


Worked scenario: Elsie has a portfolio of shares and is considering selling all of her 100 shareholding in Dinky Things Plc, which would give rise to a gain of £8,000. She also wishes to sell her 50 shares in Nougat Days Plc, which would give rise to a £8,000 gain. If Elsie sells both of her shareholdings in Dinky Things Plc and also Nougat Days Plc, she would be entitled to use her £12,300 annual capital gains tax exemption to reduce the taxable gain to £3,700.


However, Elsie could sell all of her shares in Dinky Things Plc for £8,000, plus only 26 of her Nougat Days Plc shares (for £160 each) in March 2022 and the remaining 24 shares in Nougat Days Plc on 7th April 2022, Elsie would be able to use up all of her £12,300 2021/22 capital gains allowance against the gains from the first share sale and use up some of her 2022/23 capital gains allowance against the second share sale - meaning that Elsie would pay no tax on the sale of these shares.


NB. Please be aware that the above example is for illustration only and note that the share price for Elsie's remaining shares may change if she waits to sell some of her holding in 2022/23


Savings Interest, ISA Allowance and Pension Allowance

So far Elsie has managed to think about the tax-free allowances available to her and she has utilised a number of these. There are a few extra tax-free allowances that Elsie might like to consider. As a basic-rate taxpayer Elsie can earn £1,000 of interest on savings that she invests in a savings account. It can take time to build up savings interest, so Elsie would need to think about investing her savings as early as possible to earn sufficient interest to take advantage of this allowance during the 2021/22.


Tip: If Elsie has missed this opportunity and has available savings, then she could invest her money now and take advantage of the 'tax-free savings interest allowance' in 2022/23, as the allowance remains unchanged in the upcoming tax year.


Additional allowances that may also be available to basic-rate tax payer Elsie, include the opton to invest up to £40,000 tax-free into a pension, if she has not already started to draw money out of her pension, with tax relief restricted to the higher of £3,600 or net relevant UK earnings on her individual contributions. Also, Elsie's company can contribute into her pension for her whilst securing a tax saving, as subject to a few additional considerations, pension contributions are a tax deductible cost for Elsie's company.


*This information should not be relied upon as tax advice and was based upon the relevant laws and guidance in force at the time of writing. Each businesses circumstances should be considered individually, as in our experience, every business and business owners circumstances are different therefore we strongly recommend that you speak to your accountant or contact us on (01908) 382475 if you have any further questions, as we would love to hear from you.
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