Disclaimer: this is not advice. This post is information only.

Hopefully most adults in the UK are fully aware of the tax system and don’t run into any avoidable problems. It’s important to know your own tax situation.

We all might look at tax as a massive inconvenience, but it’s got to be done. Otherwise, we wouldn’t have the NHS and other key services that we heavily rely on. I’m more than happy to pay my share, but I also want to be tax efficient.

Like many things money related, I’ve been slow on the uptake when it comes to understanding my tax situation. When I started my first limited company back in 2012, I didn’t really think about tax. This meant I thought I had more money that was actually mine to keep. Don’t do this as it will cause you issues further down the line.

If I could go back, I would have put 20% into a sperate account to cover my corporation tax. This wasn’t the case, and I was always panicking when it came to paying my tax for the first few years of having a limited company. Learn from my mistakes and get a good understanding of your tax situation as soon as possible.

Tax frustration

As an average landlord, I let any bump in the road de-rail me. Instead of focusing on plan B, I went all-in on plan A (my career as a contractor). One of the reasons for my procrastination was the tax changes affecting landlords that were rolled out in the summer of 2015. The then Chancellor, George Osborne introduced Section 24.

Up until Section 24, BTL landlords were only taxed on any profits they received. This to me was the fair way of taxing landlords. But Mr Osborne didn’t see it that way. It is fair to say I had a little bit of hate toward Osborne at the time. I was a very bitter man.

This was to be phased in between 2017 and 2021. There would be four stages. Before Section 24, the BTL landlord could offset their mortgage interest against their income. Let us call this 100% interest relief.

Every year, after 2017, 25% (one-stage) would be taken away from this interest relief. So eventually, by 2021, you would have no interest relief.

Disclaimer: I am not a tax specialist. Discuss Section 24 with an accountant so that you are fully up to speed and know exactly how it will affect you.  

UK Tax in 2021/22… for limited companies

The current tax rate for 2022 is 19%. We will use an £80,000 turnover.  We are going to use a small Electrical for an example and call them COMPANY A.

Let us imagine COMPANY A has earned £80,000 and their accountants manage to knock off £20,000 in expenses from the top line. They now pay corporation tax on £60,000 and that would be £11,400 (19% of £60,000). The money left over after expenses and corporation tax is £48,600.

The first £12,500 is tax-free. This leaves £36,100 to spend. This will be classed as dividend payments. Looking at dividends, the first £2,000 is tax-free. The remaining £34,100 is taxed at 7.5% and this totals £2,707. This will take the total tax for COMPANY A in 2021/22 to £14,107.

Self-assessment tax

The £11,400 from above will be paid to HMRC Corporation TAX. The £2,707 falls under self-assessment that needs to be completed by the end of January to avoid fines.

To see the guidelines for self-assessment tax or any other tax, visit HMRC.gov.

For me personally, I get my accountant to complete my self-assessment to ensure it is done correctly. Self-assessment will consider PAYE tax owed from taking dividends out of the Limited company.

Self-assessment payments are due by 31st January (1st payment) and also 31st July (2nd payment).

If you are required to complete a self-assessment, you or your accountant will need your UTR (Unique Tax Reference), NI (National Insurance Number) and Employer reference. Another point is that you may have to pay 50% of the projected self-assessment for the next year. This is where it can get a little complicated so it might be worth sending your accountant a quick e-mail for clarification.

See below for what is coming in 2022/23:

  • Corporation tax – 19% (no change)
  • Personal allowance – £12,750 (increase of £250)
  • Dividend tax rate – basic rate, £14,500 > £50,000 will be 8.75% (up by 1.25%)
  • Dividend tax rate – higher rate, £50,001 > £150,000 will be 33.75% (up by 1.25%)
  • Dividend tax rate – additional rate, £150,001 will be 39.35% (up by 1.25%)

Just a little warning about April 2023 – corporation tax will increase to 25%.

Try not to be negative about Tax

Look tax isn’t a nice subject for many of us. It is what it is, and we need to wrap our head round it. Burying your head in the sand, doesn’t work. I tried it for many years and it just brought me financial pain, stress and anxiety. Get organised and get fully up to speed with tax.

If you’ve ever listened to old Jim Rohn material check him out on YouTube you’ll know he was one of the most famous personalities in the personal development space. He was a speaker, author, businessman and much more.

He became successful and he became a multi-millionaire but only after meeting his mentor Earl Shoaff (check him out on YouTube), when he was 25. Before then he was broke and the big difference was a change in mindset. He talked a lot about how the seasons don’t change, or the government’s pretty much stay the same. If you want change, you have to change. And it’s the same with tax, the tax rate on a given year will remain but what is important is your perspective.

The key points from today’s post:

  1. Put enough money away each month to cover your tax
  2. Fully understand your own unique tax situation
  3. Look at some Jim Rohn material and Earl Shoaff material on mindset

Understanding your tax, is a big part of financial literacy. And if you educate yourself on money and investing, I feel it will benefit you greatly going forward.

Final note on crypto tax

This is just a quick one about crypto tax. And remember this is 100% not advice. This is just what I think based on my current knowledge.

You pay tax on bitcoin on other crypto assets on any capital gain. If you sell it, exchange it for another crypto token or send it to someone else, you’ll be charged tax on any profits made.

If you have 10 BTC tucked away very safely, you don’t pay tax while you are HODLING. You only pay tax when you sell it, exchange it or transfer it to someone else.

If you’ve taken value from today’s content, do me a favour and share it to anyone you know interested in personal finance and investing. And as always, DYOR.

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