Tax planning for small business owners in 2022/23

Tax planning for small business owners in 2022/23

By Published On: 2 March 2022Categories: Limited Company, Small Business Owner, Tax, VAT

For the 2022/23 tax year, tax allowances and the rate bands have, for the most part other than dividends, have remained the same. In this blog we explore what that means in real terms, and how your Vantage Accountant can help you trade as tax efficiently as possible in the new tax year.

3 ways to trade tax-efficiently in 2022/23

1. Use the optimum salary levels for 2022/23

There are two main scenarios for salary levels if you are the Director of your own Limited Company For the majority of cases the salary level should be:

  • If you have more than one employee in the company (i.e your spouse) – £12,570: You’re able to continue to claim employment allowance when you have more than one employee through the business. This will in turn reduce the employer’s National Insurance payable.
  • If you’re the only employee in your company – £9,100: If you as the Director are the only employee of your company then the employment allowance is withdrawn. You’ll still qualify for state pension entitlement with a salary of £6,396 pa.

As salaries are treated as a business expense, Corporation Tax relief is available. The salary levels are below the personal tax free allowance.

2. Increase the amount of dividends being taken from the Company

The basic rate tax band remains the same as the previous tax year, at £50,270. This therefore means you’re able to earn a total income of £50,270 pa before you’d have to pay the higher rate of tax. The optimum amount of dividends for most people in each tax year will be:

  • £37,700 per year (6 April to 5 April) or £3,141 per month, if on a salary of £12,570 per year
  • £41,170 per year (6 April to 5 April) or £3,430 per month, if on a salary of £9,100 per year

If you have any other forms of income, these must also be taken into consideration. This can be from anything, such as rental income, bank interest, other employment income, etc. Once you’ve calculated your total complete income you may need to reduce the dividends accordingly, to ensure you remain in the lower tax band. Remember that the first £2,000 of dividends you receive are taxed at a rate of 0%.

3. Don’t take out unnecessary funds from the company

You have the ability to decide how much tax you pay, based on the amount of dividends you take. To be the most tax efficient possible you should take dividends and salary based on the advice in points 1 and 2 above, and for any extra profit to be left in the company if you don’t need it.

What happens to the money left in the company?

You have a few options with what to do with it:

  1. You can make investments in the company name – ie shares, bonds, property. Although it is worth getting advice from your Vantage accountant before doing so, to ensure the trading status of the company is preserved.
  2. Make one-off larger dividend payments and pay the higher rate of tax (33.75%) or additional rate (39.35%) tax. There are ways to mitigate this also, for example in the form of income tax relief on EIS, SEIS and VCT investments.
  3. Leave the money within the company. When you decide to stop trading you can either:

– Draw out £2,000 per year, at a rate of 0%

– Liquidate the company and draw out the total profits in one lump sum at 10% tax rate using Business Asset Disposal Relief, subject to the new 2 year rule

  1. Pension contributions are not just attractive to the over-55’s. It’s advisable that you make contributions, as you’ll make tax savings at the highest rate of tax, or at least up to the annual contribution limits (i.e – 100% of salary or £40,000, whichever is highest), as well as Corporation Tax relief level at 19%.  Annual contribution limits, utilising both the current year and previous years with under-utilised allowances, and drawdown can be complicated, therefore we suggest speaking with our trusted financial adviser, who will be able to advise you on the set up of your pension and administer advice, should you require it. Simply get in touch with your Vantage Accountant, will be able to point you in the right direction.

What else should you consider?

Payments of dividend tax
The tax on dividends is a personal tax liability and will be payable annually as part of your Self Assessment tax return calculations. This will be due by the 31 January following the end of the tax year. Once you have taken account of any other income, tax on dividends is at the following rates:

The first £2,000 in dividends will be taxed at 0%. Above this dividends will be taxed at the following rates from April 2022 onwards:

  • 8.75% for basic- rate tax payers (on dividends falling below £50,270)
  • 33.75% for higher-rate tax payers (on any dividends above £50,270 per year and below £150,001)
  • 39.35% for additional-rate tax payers (on any dividends above £150,000 per year)

Payments on account
If you had not paid tax (or had a liability below £1,000) under Self Assessment previously you will have not had to make payments on account. It is likely however that you will now be bought within the payment on account regime. Payments on account are payments towards the following tax year.

For example if you had a liability of £2,000 for the year ended 5 April 2022, your tax payable would be:

Due 31 January 2023 – £3,000.00 made up as:

  • £2,000 – tax due for the year ended 5 April 2022
  • £1,000 – 50% of tax towards the year ending 5 April 2023

Due 31 July 2023 – £1,000 made up as:

  • £1,000 – remaining 50% of the tax towards the year ending 5 April 2023. This is known as your second payment on account

This will be taken into account the following year, and then the same process continues with payments on account for the following year.

Corporation Tax Rate
The Corporation tax rate will remain at 19%, but will increase to 25% from April 2023.

What are the next steps?
Ahead of the new tax year we will be taking a look at each of our client’s individual circumstances and will be advising adjusting salary levels to the figures shown below:

  • £12,570 per year if more than one employee through the Company
  • £9,100 per year if only one employee through the Company

The payroll summary will be emailed at the start of the new tax year in April 2022.

How Vantage Accounting can help

As always if you have any questions regarding any points raised in this blog, or would like to discuss your tax planning for the new tax year in greater detail, get in touch with your accountant. We’re here to help you make the most from your company, and make your money work as hard as possible.

Note: All the information and advice in this blog post was correct at the time of writing.

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