Year-end financial review for IT contractors

As the financial year-end comes to a close and a new one begins, Martin Hesketh, managing director of accountancy firm Brookson, reveals what the self-employed can do to maximise income, and how they can avoid any nasty surprises when completing tax returns.



Keep your finances in order



Many individuals may complete their company and personal tax returns up to nine months after the tax year ends .Therefore it is essential that you maintain good financial records and management accounts to make completing the return as simple and as straight forward as possible.



Throughout the year, there are steps you can take to achieve this enviable position. Monthly management accounts are a useful indicator for monitoring your business cash flow, by allowing you to plan and to put the necessary funds aside for the relevant tax payments. This will reduce the risk of any unwanted surprises when you come to submit your tax return.



Ensure that you understand your likely tax position ahead of the year end. This will allow you take advantage of a range of tax planning opportunities that need action within the relevant tax year



Consider pension contributions



Always consider the level of pension payment made during the year and make sure you are comfortable with fluctuating this, as opposed to leaving it unchanged.



If you believe that your personal taxable income this year will take you over the higher rate threshold for 2009/10, then you will have a higher rate personal tax bill to pay once your self-assessment return is prepared. You can reduce or eliminate this liability with pension contributions.



How much to contribute into a pension depends on:

-what you can afford

-your opinion of pensions as a long-term savings plan

-any advice provided by an accountant or your IFA

-whether you wish to use pensions as a way of reducing or eliminating a higher rate tax liability



A few benefits of building a nest egg:



* Personal contributions into an approved pension scheme attract tax relief at the highest rate and can, therefore, be used to reduce a potential higher rate tax liability

* If you operate through a limited company, contributions by your company into a pension scheme for you reduce your corporation tax liability and there is no benefit in kind



In both cases, the effect of a pension contribution can be to reduce the amount of your personal income that will be chargeable to higher rate tax and so lower your personal tax bill.



Include the right expenses



Most of the time any expenses your incur are recorded in your accounts and then paid out in the same tax year. Around the year end, however, the natural time delays involved can be significant.



Accounting rules dictate that all expenses should be recorded in your accounts in the year in which they were incurred. Your expense records should clearly state which period any costs relate to, and you should use this information when recording the expenses in your books.



Expenses claimed after the financial year end are subject tax relief but you will have to wait a further 12 months to receive this benefit.



Dividend timing



Dividends are only taxed when they are paid to you personally and, as a director, you have some control over when you pay those dividends. Therefore, you can manage the timing, and the amount, of your personal tax liabilities. Delaying taking profits from the company in the form of dividends from one year to the next can be beneficial if your income levels drop.



Throughout the year it is worth thinking about the total level of dividends you are taking. If, after allowing for pension contributions, you are likely to exceed the higher rate tax threshold then, providing you can afford it personally, you could consider delaying taking any more dividends from the company in the current tax year i.e. until after 5th April.



Keeping on top of your business finances needn't be a nightmare and the tax-savvy self-employed professional can benefit from understanding how effective tax planning can make a positive difference to their income.



In-depth regulations, however, mean that some may have difficulty understanding all of the opportunities available to them to maximise their income. Now more than ever though, as the country slowly claws its way out of the recession, it is essential that individuals and businesses get on top of their finances to ensure they are making the right financial decisions for the next financial year and beyond.







You can read more about dealing with the financial year-end in Brookson's free guide, available to download from its website.