The first in our short series of Tax Tips looks at Income Tax
The tax free personal allowance for 2022/2023 is £12,570, this is frozen until April 2026. The next £37,700 is taxed at the basic rate of 20% (7.5% for dividend income). Higher rate tax of 40% (32.5% for dividends) is charged on income above £50,270 and the additional rate tax of 45% (38.1% for dividends) is charged on income above £150,000.
Dividends are treated as the top slice of income, so the basic and higher rates of income tax are always allocated against other income first.
The effective rate of tax on income between £100,000 and £125,140 is 60%, as the personal allowance is reduced by £1 for every £2 of income over £100,000 – this also means that 60% tax relief is available on gift aid donations and pension contributions within this income band.
Possible action points to reduce your Income Tax liability and maximise Income Tax savings:
- Consider Gift Aid donations/ Pension Contributions to keep your taxable income below £100K (out of the £100k- £125K bracket)
- Where possible, exchange salary for tax free benefits / tax efficient remuneration, for example holidays, pension, car park etc
- Transfer income generating assets between spouses, to ensure that both spouses are using their personal allowance and basic tax bands
- If you have made a loss as a sole trader/partnership, make maximum use of the losses and consider carrying back under the new temporary three-year extension
- Consider using ISAs for tax free investments
- Make use of the Dividend Nil Rate Band and Personal Savings allowance in relation to investment income.
- Claim Tax Free Childcare – The Government will pay up to 20% of the costs of approved childcare for children up to 11 years old.
- Keep Child Benefit payments by keeping your income below £50K – consider how profits are allocated between partners or sacrificing salary for employer’s pension contributions for example.
- Company Car – switch to a lower emission company car, or hand it back if now working from home.
- Income tax relief is available on EIS/ SEIS investments (financial advice required).
These are just some of the areas where we can provide advice on ways to minimize your tax bill. To talk about your own Tax Planning contact Angela Keery, Head of Tax E: email@example.com or Tel: 028 9032 3466.
Information contained in this article may not be comprehensive and should not be acted upon without seeking professional advice. This article does not constitute investment advice and advice should be sought from a suitably qualified investment adviser.