5 tips to help you prepare for the new tax year

The end of the 2021-22 financial year is fast approaching — it’s time to make sure your business affairs are in order. There’s a lot to think about in the run up to the new tax year, so we’ve put together 5 top tips to help you get prepared.

1.) Adjust your tax budget based on the previous financial year

Coming into the new tax year, you’ll need to adjust the amount you put aside for tax each month. Your tax budget for 2022-23 should only remain the same if there’s been no change in business performance over the past two financial years, which is unlikely to be the case.

Sole traders will need to set money aside for self-employment tax and National Insurance contributions, rates of which vary based on personal allowance, income and expenses. Information to help you budget for these costs can be found here.

If your business is incorporated, you’ll need to budget for corporation tax, which is currently set at 19% of taxable profits and will remain at this rate in the new tax year.

2.) Take business dividends before the new tax year

Make sure you withdraw any business dividends before the end of the tax year on 5th April 2022. The current dividend allowance is £2,000, which means annual dividends up to and including this amount will be tax-free. 

Beyond this allowance, you’ll be liable to pay tax on dividends taken from the business. However, the dividend tax rate is lower than the income tax rate, which means you can use dividends to maximise your tax-efficiency (see table below).

Dividend Tax Rates & Thresholds 2021-22

3.) Ensure all business records are up to date

Making sure your accounts are up to date is good practice, but more importantly, it’s a legal requirement. Where dividends are concerned, it’s essential that you follow the proper procedures and document everything correctly, otherwise you may face financial penalties.

You must only draw down dividends from company profits once corporation tax has been accounted for (i.e. from your available profits). Taking more will be treated as a Director’s Loan in the eyes of the law, and you’ll be liable to pay interest.

4.) Stay on top of payroll deadlines and submissions

Don’t forget to file your final Full Payment Submission to HMRC, detailing the final employee payment you issue in this financial year. If you pay some of your staff monthly, and others weekly, your final submission must be the very last one, chronologically.

It’s important to make sure all previous payment submissions are up to date, and to ensure HMRC receive your final Full Payment Submission prior to 5th April 2022, or you may face a fine of up to £100.

If you have no other source of income besides salary from your business, recording a payroll run for March 2021 will help you maximise your tax-efficient income. Be sure to review and confirm the amount of salary you’ve been paid to date during the current tax year.

5.) Maximise pension contributions

Paying money into your pension via your limited company is a tax-efficient way to utilise business profits, as doing so reduces your taxable profits and, in turn, your corporation tax liability. Pension payments can be made monthly via payroll, or in periodic lump sums throughout the tax year (or if necessary, as a single lump sum prior to the new tax year).

There are limits on how much you can pay into your pension and still be eligible for tax relief. Currently, the limit is £40,000 or 100% of your salary — whichever figure is lower. Up to this amount, the Government provides 20% tax relief, which is added to your contributions by your pension provider.

Higher rate taxpayers may claim additional tax relief on pension contributions via their Self Assessment return. The £40,000 contribution (eligible for 20% relief) can be included on your return. This will allow you to claim back £8,000 in additional relief. 

If you’re a higher rate taxpayer who also makes personal pension contributions, your pension pot can be topped up by £1,000, and you’ll be able to claim £400 in tax relief. Basic rate taxpayers can also top up by this amount, with tax relief of £200.

04/03/22: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.