Contractors, are these 10 tax breaks helping you earn?
In light of uncertainty due to today’s Budget 2016 and the costliness of April’s tax reforms, the onus is on contractors to make the most of the tax system’s existing breaks and reliefs, writes Chris Conway, managing director of Accounts and Legal.
George Osborne launched a four-fold attack on contractors during last year’s Budget, but there are still a few options left for contractors who want to be more tax-efficient. Ahead of his next Budget this afternoon, we offer up 10 tax-efficient strategies contractors can employ to ensure they hang on to more of their own hard-earned income.
1. Appoint a second director or take on a part time employee
Introduced in 2014, Employment Allowance allowed employers to reduce their employer’s National Insurance Contributions by £2,000 a year, but from April 2016 companies where the director is the sole employee will no longer be entitled to employment allowance.
If you operate as a limited company contractor it might be worth appointing a second director or hiring a part time employee in order to continue benefiting from the NI Employment Allowance.
2. Take your spouse on as an employee
If your spouse or partner is not currently taking advantage of their personal allowance, which will rise to £11,000 from April 2016, your business can take advantage of their marketing, secretarial, financial or managerial skills by taking them on as a part-time employee. Provided you agree to pay them an annual salary that’s below the £11,000, threshold your spouse will pay no income tax, thanks to their personal allowance, and you will also satisfy the requirements needed to qualify for the NI Employment Allowance, mentioned above.
3. Set up a childcare voucher scheme through your limited company
If you operate as a limited company contractor and you have young children in childcare, setting up your own childcare voucher scheme could save you up to £930 a year.
Childcare vouchers operate as a salary sacrifice scheme, and employees can deduct up to £243 per month before income tax and national insurance are calculated.
If your spouse or partner is an employee they can also take advantage of your company’s childcare vouchers, taking your total tax saving to £1,860 a year.
Find out more about childcare vouchers here.
4. Enjoy the Marriage Allowance
If your spouse isn’t taking full advantage of their personal allowance, but you are unable to take them on as a part-time employee for whatever reason, this allowance will enable them to share a portion of their personal allowance with you.
The Marriage Allowance is a new tax break for married couples and civil partners that was introduced in April 2015. It allows the lower earning spouse to transfer a portion of their personal allowance to their partner, in order to reduce the higher earner’s tax liability. This can help reduce the tax bills for some lower earning contractors by up to £212 a year, although it’s worth pointing out that this allowance does currently discriminate against couples who are not married or in a civil partnership.
5. Register for the VAT Flat Rate Scheme
If you operate as a limited company contractor; your turnover is less than £150,000 a year; you contract is for VAT-registered clients and your company has relatively low expenses, then it’s worth registering for the VAT flat rate scheme. This will allow your company to pay a fixed amount of VAT to HMRC and keep the difference between what you pay and the VAT you receive from clients.
6. Take advantage of your Annual Investment Allowance
While the Annual Investment Allowance was temporarily set at £500,000 in the past, in January 2016 it changed to a permanent allowance of £200,000 a year.
Contractors can deduct the full value of any items that qualify for annual investment allowance from their profits, before calculating tax. Qualifying items that may be relevant to contractors include:
- Computers, monitors, laptops and tablets intended for business use
- Printers, scanners, routers, modems and shredders intended for business use
- Office furniture, shelving, fixtures and fittings
- Vans, trucks, lorries and motorcycles intended for business use (but not business cars, which fall under the writing down allowance; see below).
7. Use your Writing Down Allowance
The amount of capital allowance contractors can claim on business cars will depend on the car’s CO2 emissions and the date the car was purchased. Find out more here.
Beyond cars, the writing down allowance can also be used to claim a tax deduction against a portion of the value of items the contractor has brought into the business, such as computer equipment or furniture, as well as items that have been gifted to the business. You can find out more about how to calculate writing down allowances here.
8. Realise your capital gains tax relief – and double it
When selling property, investments or other assets contractors can realise capital gains of £11,100 a year before they are liable for capital gains tax. Better still, though, contractors that are planning to liquidate some of their assets can first ‘gift’ a portion of those assets to their husband or wife, in order to benefit from their tax free allowance. The net result could be capital gains of £22,200, tax free.
9. Max out pensions tax relief
Contractors can benefit from pension tax relief by investing up to 100% of their pensionable earnings in a pension scheme, provided the amount invested is below the current £40,000 annual allowance. They can also top up their annual allowance for the current tax year by incorporating any pension tax relief they didn’t use during the previous three years.
Contractors will be able to release 25% of the funds in their pension after they turn 55, tax free, by taking advantage of their tax-free lump sum. Despite concerns that Mr Osborne will scrap the tax-free lump sum in tomorrow’s Budget, the Treasury has reportedly confirmed that he will leave pension tax relief untouched.
10. Don't ignore your new personal savings allowance
In April, HMRC will introduce a new tax-free personal savings allowance, which will allow basic rate taxpayers to earn up to £1,000 of interest on savings each year, tax free, while higher rate taxpayers can earn £500 of interest without paying tax. You can find out more about this new personal savings allowance here.
It’s up to you
George Osborne has shown time and time again that he’s not on the side of contractors, so it’s up to you to ensure you make the most of the few remaining tax breaks and tax reliefs still open to you. It really is time to get your money working for you.