Top tips for end of tax year allowances 2018
As a contractor or an independent profession if you don’t have the 5th of April etched as an important date on your calendar then you definitely should writes Angela James, Financial Adviser at Contractor Wealth.
This is the date that the tax year ends and all allowances reset for the coming year, should you wish to take advantage of ways to utilise allowances then you must do so before the deadline.
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 over 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 thresholds 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 or 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?
• Every UK tax payer has an allowance each year of up to £40,000 that can be invested into a pension, 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.
• 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 method that you can use called ‘carry forward’ which will allow you to go back three years and give you the opportunity to make the most of past allowances, providing you were a member of a registered pension scheme in the tax year that you wish to use carry forward.
When do I become a higher rate tax payer?
• When your annual income from all sources equals £45,000 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 new dividend allowance?
• From April 6th 2018, the new tax-free dividend allowance will be £2,000 per annum, which is a 60% reduction from the £5,000 per annum current allowance.
What is capital gains tax and how does it affect me?
• Any investment or funds 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 £11,100 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 your gains made on your investment. You are unable to carry over this allowance so planning the disposal of any assets to maximize your returns is imperative.
So, what do I need to do?
Consider your finishing position for all income and gains for the given tax year and what your potential liabilities could be.
From there, do work through this short simple checklist to consider if you are able to or should be using any allowances are available. In many cases if you snooze you lose;
- Personal income allowance
- Dividend allowance
- ISA allowance
- Pension allowance including the last 3 years if applicable
- Capital gains
- Your ‘spouse’s/partner’s tax allowances
- Inheritance Tax/gift allowances
If you would like to discuss any of the above our financial planners are qualified and ready to assist you – Visit: Contractor Wealth
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 style of Contractor Wealth Management Limited which is an appointed representative of Intrinsic Mortgage Planning Limited and of Intrinsic Financial Planning Limited who are authorised and regulated by the Financial Conduct Authority. Intrinsic Financial Planning Limited and Intrinsic Mortgage Planning Limited are entered on the FCA Register (http://www.fca.org.uk/register) under reference 440703 and 440718. The Financial Conduct Authority do not regulate Tax Planning.