Tax Year End
Posted on: 17 Mar, 22
It pays to be well versed about tax. As the end of the Tax Year looms large Oury and Clark are talking poetry, pooches and proposing a number of ways you can set yourself up to be as tax efficient as possible.
You look disturbed Clark
I’ve just read some of your *ahem* “poetry”
You don’t like my limericks?
Well I thought the one about the young man from Nantucket had a certain ribald charm, but I didn’t really get the rest. Aren’t limericks supposed to be, you know, funny?
Everyone’s a critic! Though I’m not trying to win a Poetry Society award, I use them as mnemonics
Nuh whats now?!
I use them as little rhymes to help me remember important things and dates. You know me Clark, I’m not very good with detail until I concentrate on a subject. These are just quick ways to remind me to focus.
Could you give me an example of how that works?
I thought that you’d never ask, I do have quite a topical here.
Hit me with it.
There was a business owner called Valerie. Who paid herself quite a high salary. She should think with her head. Take a dividend instead. She’ll be much better off using the system more cannilly.
How is that topical?
Well the end of the tax year is looming and everyone should be thinking about how they can be most efficient in their dealings with HMRC. It’s particularly important this year as some big changes are coming from the 6th of April.
Change, I don’t like change. What are they?
Well, for many individuals the tactfully named “Health and Social Care Levy”
Oooh, I think I heard about that on the news, but I didn’t really grasp the big picture. What is it?
So officially it is a “temporary 1.25 % increase to most classes of National Insurance (NI). The revenue raised will go directly to support the NHS and equivalent bodies across the UK.”
Great idea, I mean the NHS is great and 1.25% isn’t so bad is it.
Well, that is until you really look at the maths. Take employee’s NI which is currently 12%, adding 1.25% makes it 13.25%, which is an actual increase of 10.42%!
Ouch! So everyone who pays NI will pay it?
No, no, no. Only employers, employees and the self-employed who are liable to pay NI; as well as individuals who would be liable were it not for pension age restrictions. Those who pay Class 2 and 3 NI will not be affected.
So basically everyone then?
Yep, pretty much
So it’s basically a National Insurance increase?
Well, yes… but no.
What do you mean? Is it Schrödingers National Insurance increase?
Ha ha, if you read the legislation (and I’ve done it so you don’t have to) from April 2023, the NI contributions rates will revert to 2021/2022 tax year levels…
Oh yes, I remember, temporary.
Not quite, I hadn’t finished
Sorry
That “temporary” NI increase will be replaced by a new 1.25% Health and Social Care Levy. The revenue from this will be ring fenced to support UK health and social care bodies.
So it falls on the same people then?
No, not exactly.
See, this is why I don’t like change (though I did like the £2 coin when they brought it in). What do you mean? Are less people going to be liable?
Don’t be silly Clark, more people will be affected as dividend rates (excluding the nil rate of course) are also going to be going up by 1.25%. This is for the same basic reason as the NI increase – to finance health and social care.
Hang on, if there is a “nil rate” does that mean there are lots of other rates? Am I going to need a limerick to remember the changes for each of them?
Well you could do that, but I’ve got them written down on a table here, just in case anyone asks. For 2021-22 the dividend rates for individuals are:
Nil rate – 0%
Ordinary rate – 7.5%
Upper rate – 32.5%
Additional rate – 38.1%
So for the new ones I just add on 1.25% to each
Exactly right, the proposed new dividend rates for individuals are:
Ordinary rate – 8.75%
Upper rate – 33.75%
Additional rate – 39.135%
The nil rate stays the same of course at 0%
Ah, I see, so this will Impact people like Valerie in your limerick. owner managed business who work through a company and reward themselves through a mix of salary and dividends?
Spot on. Now do you see why my limericks are important?
I’m getting there, but isn’t this all to pay for Covid-19 support schemes? seems a bit unfair as a lot of people like Valerie didn’t qualify for anything under those schemes.
The Levy has nothing to do with that.
It sounds like an increase in Income Tax
Well, yes
But you said it was an increase in National Insurance?
That too
Then why is it called a Levy?
My dear Clark, you’re asking the wrong question. Even the Treasury accepts that, in their own words ‘businesses may choose to adjust wages, prices, or profits’ as a result of the “Levy” so it’s better to plan to avoid it if you can.
Ooh, how can I do that?
Well you can pay any bonuses before 6 April; which will avoid the “not NI” hike.
OK.
You can also pay dividends before 6 April to avoid the tax hike. Also, if you are an owner managed business, you might want to prepare accounts earlier than normal so that you have a good idea of the reserves available for distribution.
Sounds like you could help with that Oury. Tell me more!
Indeed I could. For the wealthier individual it’s important to remember that your Personal Allowance goes down by £1 for every £2 that your income is above £100,000. This creates an effective tax rate of 60% on income between £100,000 and £125,140.
Yikes!. After this chat I was going to pay myself a bonus to avoid that tax/NI/levy thingummy but that would push me over £100k for the year.
Don’t panic, you should simply consider ways that you could reduce your taxable income in that band.
How exactly would I do that?
Well there are things like pension contributions. If you have not used all of your previous years’ annual allowance (usually £40,000 or 100% of earned income), you may actually be able to make contributions over the annual allowance in the current year. Call your financial adviser. He can help.
Anything else?
You can make contributions under Gift Aid to your favourite charity.
Thanks for reminding me. I keep forgetting to do this.
Plus you could also consider transferring that property that you own into joint names with your spouse so that the income can be shared. As his income is a lot lower, he will pay tax at basic rate which could save the family 20% to 25% tax.
What about that pesky Capital Gains Tax?
Fear not. The property can be transferred to your spouse without incurring Capital Gains Tax (CGT).
If I do this, will I still be able to use my CGT annual exemption of £12,300?
Yes. And it is advisable to use it if you can because it is lost if you don’t.
Great, is there anything else?
There are actually quite a lot of things you can do, some of which will suit some people better than others. Everyone’s situation is different after all. The best thing that you can do is to contact your accountant or financial advisor and take it from there.
But you are my financial advisor and accountant.
I know but I’ve got to run to a meeting of the ACA Poetry and Writing Society.
PAWS?
Yes and the chairman Romeo Malone is a stickler for punctuality. But in the meantime, read this excellent quick guide by my friend Jeremy who has forgotten more about tax than most people will ever know. And let’s set up a meeting as soon as possible, remember we have to sort all this out before April the 6th.
Thanks Oury, I don’t know what I’d do without you.
Pay a lot more tax I would imagine.
Disclaimer
We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open-minded people and think independent thought and debate are essential to help us understand as well as navigate complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses – we provide information and hopefully some wisdom – and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial, way of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.
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