As the end of the tax year fast approaches, Michael Hesketh, partner and head of tax at Azets, provides some top tips when considering income tax.
BEWARE OF RISING INCOME…
Wage growth hit a record in 2021, and together with other tax changes, such as the loss of loan interest relief, the unwary could find themselves with a considerably higher level of income than in previous years.
By way of example, from April 2020, all loan interest on residential property has been disallowed in the rental income computation, with instead a 20% tax credit given against tax liabilities. What this means is that, if before the changes were introduced your income was £50,000 after allowing for £6,000 in loan interest, for 2021/22 your taxable income will now be £56,000.
The downside to this, other than a potential higher rate tax liability, is the knock-on effect on certain benefits and allowances. The savings income allowance, for example, is £1,000 for those paying tax at basic rate, but is halved to £500 for higher rate taxpayers. As shown above, by earning the exact same amount in rental income in real terms, you could end up with a higher tax liability and lower allowances.
The one to watch out for is the high-income child benefit charge, which is clawed back at a rate of 1% of the benefit for every £100 of income earned over £50,000 per individual. Again, a slight rise in wages, or the effect on rental income as described could mean you face a larger tax bill at the year end when you are required to pay back excess child benefit received.
THINK ABOUT GETTING A NEW CAR
If you are able to choose a new company car for the year, it may be worth considering changing your car to a model with lower emissions to save tax. But be very careful, as not all new cars are equal, particularly when looking at traditionally fuelled vehicles.
For the three years from 6 April 2020, unusually, the taxable benefits on your petrol/diesel company car first registered before 6 April 2020 will not increase each year.
Normally the emissions move up a benefit bracket even when the level of CO2 emissions for the vehicle have not increased. However, cars registered after 6 April 2020 are subject to a new test of C02 emissions, meaning that the same car can have considerably higher CO2 emissions than under previous testing. For a standard petrol or diesel engine car, the benefit percentages go up to 37%.
If you are feeling green, you could go for an electric or hybrid car, where rates are based on the electric range of the car, and where benefit charges can be as low as 1% for 2021/22. If the car is fully zero emission, for 2022/23 the proposed benefit is 2%, where it will stay for 2023/24 and
2024/25, so it might be worth considering as a tax-effective option.
Do note, if you don’t pay your employer back for the fuel which has been used privately, there will be a fuel Benefit-in-Kind charge based on the car’s CO2 emissions, and in most cases, the taxable cost of the benefit outweighs the cost of actual fuel used. It may be worth considering, therefore,
whether it would be better to reimburse your employer in full for any private usage.
Of course, the cheapest option of all is to have an employer provided bicycle (cycle to work scheme), because, provided these are available to all employees, this does not give rise to an employment benefit at all, saves you and your employer tax, and may greatly benefit your health!
INVEST FOR CAPITAL GROWTH RATHER THAN FOR DIVIDENDS
Currently, the rates of tax on income and gains are quite different. The maximum rate of tax on gains is 20% (28% on residential property and carried interest) compared with 38.1% on dividend income, or 45% on interest/rental income (or even an effective 60% rate in the narrow band where the
personal allowance is withdrawn as mentioned above).
From 6 April 2022, there will be a 1.25% increase in dividend rates, taking rates to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.
While it is not acceptable to pretend or artificially generate gains out of income, where you have substantial investments, it would be possible to rearrange your portfolio such that it is invested in assets producing capital gains rather than income. This way you could end up with either a tax-free, or tax reduced return as part of your overall investment strategy.
You should note that tax rates can change over time, and The Office of Tax Simplification has recommended, subject to government policy, an alignment in income and capital gains tax rates, as covered later in this document under Capital Gains.
DON’T FORGET YOUR WORK FROM HOME ALLOWANCES
If you are employed and have been required to work at home by your employer because of COVID-19, and as a result your household costs have increased which have not been reimbursed by your employer, you are eligible to claim working from home tax relief at a rate of £6 per week.
In certain situations, a claim for a proportion of certain household expenses can be made, if that is higher than the equivalent of £6 a week.
Unusually, HMRC decided to give the allowance for the whole year, even if the requirement to work from home is not there for the complete year. This appears to be an administrative short-cut for HMRC, to prevent employees having to opt in and out over the tax-year.
HMRC also introduced a temporary measure in 2020/21 in relation to purchase of equipment for COVID-19 workers which has been extended to 2021/22. Equipment bought and reimbursed by your employer will not be taxed providing:
• The equipment is obtained for the sole purpose of enabling the employee to work from home as a result of the Coronavirus outbreak.
• The provision of the equipment would have been exempt from income tax if it had been provided directly to the employee by or on behalf of the employer.
PLAN FOR THE NI AND TAX INCREASE FROM APRIL 2022
A 1.25% National Insurance (NI) and dividend tax increase applies to remuneration and dividends
from 6 April 2022. Family businesses in particular should, subject to commercial considerations, consider the level of remuneration and dividend distributions for 2021/22.
Bringing forward, for example, a dividend payment to before 6 April 2022 will save the additional 1.25% charge, although the personal tax due on the dividend will be payable by 31 January 2023.
Also, are you aware of the tax reliefs and allowances that you may be entitled to? If you are unsure, then you are probably paying more tax than necessary. As the end of the tax year approaches, now is the time to act to potentially reduce your tax liability.
In our latest guide, we summarise the different tax-saving options available, profiling the different measures you should consider to maximise your tax efficiency, which could lead to those all-important cash tax savings.
Download our 2022/23 Personal Year End Tax & Financial Planning Guide.