As a contractor or an independent professional if you don’t have the 5th of April etched as an important date on your calendar then you definitely should. This is the date that the tax year ends, and all allowances reset for the coming year. If you don’t want to miss out on these tax breaks, please make sure you act fast.
As a busy professional, other priorities can often take precedence but here are some frequently asked questions by others in your situation that you may want to think about before the deadline comes and goes and you potentially give away too much of your hard-earned money to the tax man this year!
What is an Individual Savings Account (ISA) and how can it benefit me?
As a contractor you will very often be in or close to the higher rate tax bracket while in most cases maximising your dividend allowances. An ISA will offer you a tax-efficient haven for your savings, meaning that you can receive gross interest on returns on your funds and even better this will not impact your other income allowances. ISAs can be cash or investment or a combination of the two. They also offer a great source of income in the future that can be taken with no income tax to pay.
What is my pension allowance?
The current pension annual allowance eligible for tax relief is up to 100% of your UK relevant earnings up to a maximum of £40,000. In some cases, this could be even higher if you have ‘carry forward’ options available to you.
For contractors and the self-employed this can be a particularly useful way to use income that you have been reluctant to draw due to increasing your income tax liabilities.
Contractors typically pay themselves a low basic salary which is topped up by dividends. Dividends are not classed as relevant earnings and so your pension contribution is limited to the salary you take. To be able to contribute more than the salary you take, you could explore the possibility of making employer contributions instead.
For business owners this is particularly beneficial in reducing corporation tax liabilities, other deadlines to consider are your company’s year-end.
Pension tax relief is available at your highest rate of tax and is one of the most efficient ways of reducing your tax liabilities.
What is carry forward?
There is a possibility that you can use carry forward which will allow you to go back three previous tax years to give you the opportunity to make the most of unused allowances, providing you were a member of a registered pension scheme in the tax year you wish to carry forward.
When do I become a higher rate tax payer?
When your annual income from all sources equals £46,350 or more, and for a contractor running their own limited company, this will include dividend withdrawals, which would then be subject to a dividend tax rate of 32.5%*
What about the dividend allowance?
Good news in the latest budget was that the tax-free dividend allowance would remain unchanged at £2,000 per annum. Have you and your partner, if applicable, utilised your allowances for the current year?
What is capital gains tax and how does it affect me?
Any investment or funds (not inside a pension or ISA wrapper) including properties that aren’t your main residence, are subject to this tax on disposal. This is sometimes considered a forgotten tax; you have an allowance available of £11,700* each year that can be used on gains before any tax is paid. The tax is fairly substantial and can be as high as 28%* of the gains made on an investment. If you do not use this allowance in the current tax year, you are unable to roll it over to next year, so planning the disposal of any assets to maximize your returns is imperative.
So, what do I need to do?
Consider your position for all income and gains for the given tax year and what your potential liabilities could be. Think about the allowances you haven’t taken advantage of as most allowances, if not used, are gone and gone forever.
From there, work through this short simple checklist to consider if you can or should be using any allowances available;
- Personal income allowance
- Savings allowance
- Dividend allowance
- ISA allowance
- Pension allowance including the last 3 years if applicable
- Capital gains allowance
- Your spouse’s/partner’s tax allowances
- Inheritance tax/gift allowances
If you would like to discuss any of the above please do speak to your accountant or our financial planning partners who are qualified and ready to assist you with any of the investment allowances.
*Figures correct as of the time of writing on the 25th March 2019
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Contractor Wealth is a trading name of Contractor Wealth Management Limited an appointed representative of Quilter Financial Services Limited and Quilter Mortgage Planning Limited which are authorised and regulated by the Financial Conduct Authority. Registered Office: Albany House, 5 Omega Park, Alton, Hampshire GU34 2QE. Registered in England and Wales number 07773485. Albany House, 5 Omega Park, Alton, Hampshire, GU34 2QE.