Get on top of tax in 2022/23

If you’re a limited company owner, then it is worth thinking about the coming tax year now. You may be aware that the UK tax system will undergo some significant changes in 2022/23, but what do you need to know as a contractor? The following three tips will set you up for success:

1. Get your salary levels right

As a director, you can decide your own salary. If you want it to be tax-efficient, then linking it to either your Personal Allowance or NI Threshold is a good place to start.

If you have more than one employee in your company (for example, if a family member is employed) then you should consider a salary of £12,570, as you will be able to claim the employment allowance. This amount hasn’t changed for the coming tax year, and will reduce your company’s National Insurance.

If you’re the sole employee of your limited company, then a salary of £9,100 makes more sense, as you will not be eligible for the employment allowance. Keeping your pay this low will mean you are not eligible for National Insurance – but you will still be entitled to a qualifying year of State Pension.

Additionally, these salary levels are below the standard income tax personal allowance and you can apply for corporation tax relief on them (as salaries are considered a business cost).

2. Make the most of the basic rate tax band

Tax bands remain the same as they were in 2021/22, meaning the basic rate is £50,270. Once you earn more than this in a year, you’re eligible to pay more tax. This includes all other income as well as salary, so if you were to take all your other income as dividends, you would take either £37,700 a year (on a salary of £12,570) or £41,170 a year (on a salary of £9,100).

But do remember that other income, such as rent from property, income from other employment, etc., also counts towards this figure… so adjust it accordingly!

3. Keep as much money as you can in your business

The basic tax planning opportunities for limited company owners are the same as they were last year, so you need to consider how much money you can afford to leave in your company’s account. Money that you keep in your company can be used in a number of ways which are more tax-efficient than taking it as income.

For example, you can use it to make pension payments, make investments in your company’s name (but if you choose to do this, do check with your accountant first to ensure your company’s trading status is preserved) or simply keep it there until the company is shut down. In this last case, you have some more tax efficient options for claiming this cash when you close your business down than you do while it is still operating.

If you’re a small business owner, whether that small business is a limited company or partnership, or whether you’re a sole trader, contact JW Hinks on 0121 456 0190. Our friendly and professional tax team can help you make the most of your situation and ensure that you do not pay more tax than you need to.