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Posted By Ryan Oates

As a sole trader or SME, are you sure you’re maximising your income and making most of all the tax allowances available?  Have you made a financial plan for 2021/22? If you have yet to do so, here’s a brief overview of the common financial planning points you need to consider:

1. COVID related support scheme

Self-Employment Income Support Scheme fourth grant 

  • At the Budget it was confirmed that the fourth SEISS grant will be set at 80% of 3 months’ average trading profits, paid out in a single instalment, capped at £7,500
  • The fourth grant will take into account 2019 to 2020 tax returns and will be open to those who became self-employed in tax year 2019 to 2020
  • For more information and eligibility on the SEISS grant, please visit here.

Coronavirus Job Retention Scheme (furlough scheme)

2. Reduce your Corporation Tax or pay less Income Tax

  • Employer pension contributions are usually tax-deductible expense for Corporation Tax. Therefore, business owners could reduce their net profit by contributing into their pensions
  • If you are a sole trader, you can reduce how much Higher Rate Income Tax (at 40%) you pay by making additional pension contributions. Your Basic rate threshold is increased by the total gross employee contributions made in that tax year
  • Each individual has an annual allowance, which is the total employer and gross employee contributions each year that can receive tax relief. The annual allowance is £40,000 or your taxable income, whichever is lower
  • Please note – an individual’s annual allowance may be lower if their taxable income (from all sources) is above £240,000

3. Are you a higher rate taxpayer and your pension contributions are paid from your net pay? 

  • If you are a higher Rate Taxpayer and you are contributing into a pension, you will be entitled to higher rate tax relief which will need to be claimed from HMRC. This can be requested via a self-assessment tax return or contacting HMRC direct

4. Plan for emergencies 

  • Create a savings pot of 3 months’ salary to sustain you in the event of job loss, accident, or illness

5. Have you used your ISA allowance for the current tax year?

  • The main difference between an ISA and any other savings account is that it offers tax-free interest payments. Depending on whether you are saving for the short term or long term you can choose whether to use a Cash ISA or an Investment ISA
  • The ISA allowance is £20,000 each year

6. Have you or your family used the Junior ISA and Lifetime ISA allowances for the current tax year?

  • A great way for you and grandparents to save for your children’s future. The Lifetime ISA can be particularly useful for anyone looking to save for a deposit on their first home

7. Have you reviewed your mortgage costs in the last two years? 

  • It is important to review your mortgage interest rate frequently, particularly if your fixed term period is coming to an end. Lenders will often automatically enrol you onto their Variable Interest rate which can be substantially higher.

8. If married, could you benefit from the Marriage Allowance?

  • Marriage Allowance lets you transfer £1,250 of your Personal Allowance to your husband, wife, or civil partner. This reduces their tax liability by up to £250 in the tax year (6 April to 5 April the next year).
  • To benefit as a couple, the lower earner must normally have an income below your Personal Allowance - this is usually £12,500
  • This is not available to couples where one of the individuals earns more than £50,000 a year

9. Have you reviewed your Will and Shareholder Agreement recently?

  • If you die without a valid Will in place, it is difficult to control what happens to your estate. Instead, it can lead to the government deciding who gets what under - the rules of intestacy.
  • Owners of a Limited Company should also review their Shareholder Agreement periodically. Shareholders’ agreements are often used as a safeguard and to give protection to shareholders – amongst many other things

10. Have you reviewed your life cover and protection requirements recently?

  • Do you have the right cover in place to protect any outstanding debt in the event that the worse was to happen to you or your loved ones? Would your family be able to maintain their lifestyle should your income stop due to illness or injury?
  • Many business owners would benefit from a ‘Relevant Life Plan’, which is a tax efficient way for your business to pay for your life cover 
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