So what taxes are increasing in the 2022-23 UK tax year?
- The increase in national insurance (increasing by 1.25 percentage points for employees);
- The increase in dividend taxes (mirroring the NI increase); and
- The freezing of income tax bands and allowances until April 2026, which will therefore result in increasing numbers of taxpayers being caught by higher tax rates.
The below outlines some potential planning options.
Pension contributions
Increasing pension contributions is a classic way for taxpayers to reduce their tax liability. In this regard, one should remember that for taxpayers, tax-efficient pension contributions can be:
- Up to £3,600, if your annual income is below this figure; or
- Your employment (or self-employment) earnings for the 2021-22 UK tax year, to a maximum of £40,000.
Most taxpayers are not contributing their maximum annual contributions and increasing contributions – particularly where the taxpayer is earning more than £50,270 a year (the rate at which the 40 per cent tax rate starts to apply for most taxpayers) – so pension contributions can therefore be a tax-efficient step. It can be particularly tax-efficient, where taxpayers are:
- Earning between £50,270 and £60,000 a year and are subject to the Higher Income Child Benefit Clawback on the child benefit that they (or their spouse/partner) claims; or
- Earning between £100,000 and £125,540 a year – a tax rate at which one usually pays tax at an effective rate of 60 per cent (because of the £1 reduction in the personal allowance that applies for every additional £2 that one earns in this income band).
Hence taxpayers who are able to increase their pension contributions now or in 2022-23, where they are in one of the above ‘punitive tax areas’, can get more tax relief from their contributions than would usually be the case.
Flexible benefits?
Does the employer offer flexible benefits? For example, if you sacrifice an element of salary, will they provide you with increased employer pension contributions or additional annual leave?
If so, taxpayers should note that such options are usually tax-efficient. For example, HM Revenue & Customs has not – as yet – learnt to tax annual leave entitlements, while employer pension contributions are NIC efficient (whereas direct employee pension contributions are not) and do not, subject to certain annual limits, trigger a tax liability for the employee either.
While flexible benefits options have traditionally been NIC and tax efficient, the absolute value of such options obviously increases with higher taxes.
Freelance contractors
Freelancers working through their own personal service company may also want to review how and when they draw income from their businesses. For example, it may be sensible to increase their drawings – whether taken as salary or dividends – prior to April 5 2022, so that they:
- Avoid the increase in employee and employer NICs; and
- Avoid the increase in dividend tax rates that applies for the 2022-23 tax year.
However, care does need to be taken in this situation. For example, if their drawings are typically, say £50,000 a year from the business, increasing these in March 2022 by say, £10,000 would avoid the increase in NICs (assuming the drawings are in the form of a salary or bonus), but would actually push them into the 40 per cent tax band for 2021-22.
Additionally, freelancers may wish to consider whether they should start using their spouse or partner in the business and ensuring that they get a salary (or partnership drawings, for example). While care needs to be taken in this regard and any salary paid to a spouse, for their work in the business for example, should be legitimate, it may help reduce a family’s cumulative tax liability in some situations (for example, where the freelancer is the main breadwinner).
Whose name is the investment income in?
Spouses and civil partners, for example, with investment income in joint names (or potentially just in the name of the main earner), may wish to consider transferring the name into the name of the spouse or civil partner with the lower income.
Such transfers of assets between spouses and civil partners do not trigger any capital gains tax implications at the time of the transfer and can ensure that, for example, the investment income nil tax bands and lower tax rates are being utilised as effectively as possible.
Letting income
Care does, however, need to be taken with certain types of investment income before you transfer the ownership between spouses or civil partners. For example, if one has letting income and there is a mortgage on the buy-to-let property, the approval of the mortgage holder would be needed before the transfer can go ahead.
One also needs to assess whether any transfer of ownership triggers a charge to stamp duty land tax, which can depend upon whether there is a mortgage or not.
One also needs to understand whether the property is held as ‘tenants-in-common’ or ‘joint tenants’. Tenants-in-common own the property ‘communally’ – if one were to die, the property goes 100 per cent to the remaining owner. In contrast, joint tenants each own a specific share of the property personally in their own rights and would not be able to directly transfer the income for that share to their partner directly – rather, they would need to change the ownership structure to tenants-in-common first.
Isas
Another option for taxpayers looking to be as tax efficient as possible is to ensure that they use their annual Isa limit of £20,000 before April 5 2022. While one does not get tax relief on contributions to an Isa (although people under 40 can join a Lifetime Isa and get some tax relief), they do benefit from tax-free growth and are also tax-free when the money is taken out of the Isa.
As such, the earnings from the Isas on a going forward basis will not be subject to the increased tax burden that arises for taxpayers from April 6 2022 onwards. It is also worth remembering that each spouse/partner in a relationship has access to the £20,000 annual Isa limit.
Charitable contributions
When should a taxpayer make their charitable contributions, for example via gift aid?
While tax is unlikely to be a primary driver, one should be aware that making a significant charitable contribution does have tax implications. As such, if one is likely to be in a different (higher) marginal tax band in 2021-22, for example, than they are in the present tax year, it may be tax efficient to delay the charitable contribution until April 6 2022.
Summary
While care needs to be taken with any tax planning and tax should not be the only factor driving one’s decisions, the above guide does highlight a number of factors and options that taxpayers can consider as they review their financial affairs and look at the impact of higher and higher effective tax rates over the coming years.
Robert Salter is client service director at Blick Rothenberg
