Tax year-end guide for contractors

Working for yourself comes with plenty of benefits, but there are also a number of responsibilities involved, such as your tax, writes James Roberts of Brookson, a contractor accountancy firm.

Complying with the current rules and regulations can become a headache, making it difficult for those running a limited company, among other independent workers, to get to grips with the best ways to optimise their income.

We’re now well into the 2013-14 tax year and year-end tax returns may soon be upon us, with balancing payments of income tax liabilities for 2012/13 falling due on 31st January 2014 , together with the first payment on account for 2013/14. But by planning effectively ahead of time, you can make the whole process much less painful.

Keep on top of your tax bills

If you’re filling in your tax returns up to nine months after the end of the year, it is crucial you stay on top of your tax position throughout, from the beginning. Once the year is over it will be difficult to put any planning measures in place, so it makes a lot more sense to plan ahead and stay up-to-date.

It’s vital that you know and understand your financial position at all times. When it comes to tax, it makes far more sense to have an idea of your liabilities ahead of time so you can make the most of tax planning opportunities within the relevant tax year.

Consider pension contributions

Always think about your pension contributions throughout the year – are you happy with them?

If your personal taxable income this year will take you over the higher rate threshold, then you’ll also face a higher rate personal tax bill once your self-assessment return is prepared. Pension contributions are a great way of reducing or even eliminating this liability.

The amount you should pay into your pension depends on a number of factors, not least what you can afford and your attitude towards pensions as a means of saving in general.

Personal contributions into approved pension schemes attract the highest rate of tax relief, so they can be used to reduce your higher rate tax liability. Indeed, if you work through a limited company your contributions will also reduce its corporation tax liability. In both cases, the right choice of pension can reduce your overall business and personal tax bill.

Include the right expenses

Most of the time expenses are incurred, recorded in your accounts and then paid out in the same tax year. However, around the end of the year, time delays can mean this is not the case.

Expenses claimed after the financial year ends still attract tax relief but you may have to wait a year to receive it. Make sure you regularly submit your expense claims, especially close to the year-end.

Dividend timing

Dividends are only taxed when they are paid to you personally and, as a director, you have control over when you pay them. This means you can manage both the timing and the amount of your personal tax liabilities. If your income level drops, it could be a good idea to wait until the next financial year before taking profits from the company.

Think about the total dividends you take from the company across the year as a whole. If it’s likely to take you over the higher tax rate threshold, it might be worth holding off taking any more until the next financial year if you can afford it.

Need more help?

Further advice about planning for your tax year-end is available by directly contacting Brookson, Brookson Financial Services or another independent financial adviser. Alternatively, additional guidance on planning for the tax-year end, including how to change a company’s year-end, is available on ContractorUK.

Monday 14th October 2013