Taxevo’s 7 top tips for contractors and freelancers to reduce your income tax bill in 2022

The sunshine is finally here, hooray! And whilst your mind might be jetting off to hotter climates, sandy beaches, and cold fruity drinks, it’s a good time to take stock of your tax and whether it’s working as hard as it possibly can for you.

This blog explores the top 7 things you can be doing to minimise your income tax bill in 2022, and in turn maximise your contractor or freelancer take home pay.

1. Make pension contributions

Personal pension contributions are made from money that has already been taxed, so as a taxpayer you will have already paid X net amount (for example 80% if you’re a basic-rate taxpayer, 60% as a higher-rate taxpayer, and 55% as an additional-rate taxpayer), HMRC will then contribute the tax paid on that contribution, directly into your chosen pension scheme. The total amount is therefore invested tax-free, so for example:

Basic-rate taxpayer – pays in £80

HMRC ‘tops it up’ – £20

Total amount – £100 – investment grows without income tax or Capital Gains Tax

If you’re a UK resident aged under 75 who’s not currently receiving their pension, you’re able to contribute a maximum of £40,000 per annum from your earnings, and still receive this relief. If you have a spouse be sure to check they’re also using their full allowance.

2. Make pension contributions on behalf of your partner

If your partner isn’t currently earning, you’ll be able to contribute to their pension in a tax-efficient manner so long as you remain paying tax. Your partner must be a UK resident, not earning themselves, and not already be receiving a pension in order to qualify. You’re able to contribute a maximum of £2,880 per annum and HMRC will then top it up to £3,600 with the remaining £720.

3. Make sure you’ve used up all of your pension and annual allowance

Check over the past three years to see if you have any used pension annual allowance, as you’re able to carry this over. Be aware that you can only do so if the pension scheme was in place during this period of time.

4. Make a financial gift to charity

Financial gifts given to UK registered charities are exempt from income tax, so long as you sign a gift card declaration when making the donation. For example, if you were to donate £80, HMRC would pay the additional 20%, so the charity would in face receive a total donation of £100. If you’re higher or additional-rate tax payer the tax bands are extended, respectively.

5. Transfer investments to your partner

You should revise any investments you have annually, to ensure they’re in the best proportion for tax purposes, should you share them with a spouse. If funds are generating interest, and your spouse isn’t receiving an income from employment, trading or property lettings that exceed £17,570 in 2022/23, then the first £6,000 of the received amount will be tax-free.

If you find that your spouse does in face have non-savings earnings that exceed this amount, basic-rate taxpayers should earn a minimum of £1,000 interest, and for higher-rate taxpayers it’s £500 to be able to take advantage of the personal savings allowance. If the investment income generates dividends, then each spouse should hold enough capital to generate dividends of £2,000 (which is the annual dividends allowance – but please be aware that this amount is not means tested).

6. Transfer your personal allowance to your partner

The marriage allowance allows you to transfer 10% of your personal allowance to your partner if you’re married, and vice versa, so long as you’re both paying the basic-rate amount. This process can save you £252 per annum, which can be done online through HMRC.

7. Make sure you’ve used your full ISA allowance

ISAs are a great way of increasing your income tax-free. Whether it’s stocks and shares you’re into investing in, or cash ISAs, remember you have a limit of £20,000 for the tax year 2022/23. You also have £9,000 for a junior ISA, should you have one for your children.

How can your Taxevo accountant help you?

One of our main goals as your trusted contractor accountant is to ensure your money is working as hard as it can for you, in the most tax efficient way possible. Our expertise in the complex and sometimes demanding issues Limited Company contractors face mean that it’s our job to ensure you receive the right advice and support you need, in order to maximise your take home pay. Get in touch with your Taxevo Accountant to discuss any points raised in this blog.