Contractor Financial Planning: Top tips for contractors in 2023
What are the best ways for contractors to consider financial planning in 2023? Below are some top tips to consider and ensure that you are making the most of the year ahead.
As economic pressures continue, our taxes rise and the cost-of-living crisis rages on its imperative we sit and consider our own financial situations.
Now is the best time to review your finances as a contractor and make sure your company, take-home pay, investments, savings, tax breaks and much more are all in the best shape they can be for 2023. There’s also the coming new tax year to consider, which will likely be here before you know it.
The current assessment is that it’s more important this year than last year to not miss out on the available tax breaks as a contractor, as we see the squeeze on taxes continue. Next year will be too late to start looking.
Below are some top tips for contractors to help their financial planning and to get you thinking - to make sure your money is going to go further at a time when every little is going to help.
1. Marriage allowance
Often overlooked, the marriage allowance allows a spouse to transfer £1,260 of their personal allowance to their spouse or civil partner. This saves £252 in the given tax year on taxes owed. Although this sum doesn’t seem like much, it’s definitely not to be sniffed at!
To benefit as a couple, the lower earner must normally have an income below the personal allowance, this is usually £12,570. And you as the contractor and main earner must have total income under the higher rate thresholds.
You can also back date your claim to include any tax year since the 5th of April 2018 that you were eligible.
More information can be found on the link: https://www.gov.uk/marriage-allowance
2. Pension allowance
Every UK taxpayer has an allowance available to them every year that they can save into a pension of their choice of up to £40,000. In some cases this amount could even be higher if you have ‘carry forward’ available to you. For the self-employed, contractors or company directors, this can be a vital allowance that is particularly useful to use when you have income available that you have been reluctant to draw due to increasing your tax liabilities.
For incorporated business owners in particular, a pension allowance can be beneficial in reducing corporation tax liabilities. This is another deadline to be mindful of if you’d like to avoid a nasty sting in the shape of a penalty -- your company year-end.
This is the single most tax efficient investment opportunity available with corporation taxes rising, reduced dividend allowances and even for those on inside contracts you could further reduce your national insurance liabilities by paying at source via salary sacrifice options.
Pension tax relief is available to you at your highest rate of tax and is considered one of the single most efficient ways of reducing your tax burden in any given year.
3. Carry Forward
We mentioned it above so let me attempt an explanation. ‘Carry Forward’ will allow those individuals who are eligible to go back up to three tax years and provide the opportunity to use up those unused allowances. That is on the condition that you were a member of a UK registered pension scheme in those tax years that you wish to use.
Keep in mind though, other eligibility criteria will apply.
4. ISAs; what is an Individual Savings Account and how can it benefit me?
These types of savings and investments are a very useful tool for achieving gross interest or returns on your savings as a contractor.
In particular, if you are close to or in the higher rate tax thresholds the income achieved on an ISA will not affect other allowances available, such as savings or dividend allowances.
ISAs can be cash-based, investment, or a combination of the two. They are also a very useful source of future income that can then be achieved tax-free.
5. Higher rate reality
Fortunately or unfortunately as the reality actually is, our personal allowance and basic rate allowances remain unchanged for the current and new tax year. However, for those contractors now on inside contracts you may find that you get caught out by the reduction to the additional rate threshold. This has seen a fairly significant reduction from £150,000 to £125,140. On top of this we have also seen a significant drop to the tax-free dividend allowance, reducing to £1,000 and then to £500 by 2024.
The higher rate catches you when your annual income from all sources exceeds £50,270, including rental income, investment income and for those running their own company, this will include dividends too.
Other benefits such as Child Benefit can also be affected at this level of income, so be aware.
Fortunately, there are options available through some forms of investment to restore or reduce the levels of income to mitigate this threshold.
6. Gains Tax
Any investments including shares and property that is not your main residence are subject to this tax – CGT - on disposal. This tax is often considered the ‘forgotten tax.’
This tax allowance is being cut significantly into the new tax year, being halved to £6,000 from April 2023 and then further to £3,000 from April 2024.
For gains above this amount the tax can be as high as 28%, which is fairly substantial.
In addition, you are also unable to carry forward any unused allowances from year-to-year. Planning the disposal of assets (taking into account your income in a given year) is vital to ensure you don’t pay more tax than you need to.
Run the ‘stand back and tot-up’ test
So, where’s a good place to start – or what do contractors need to do? Always consider your finishing position for all income and gains in the current year with a forward view in mind of the coming year, looking at what your potential liabilities could be.
From there, work through all the allowances that are available to you, allowing enough time to take action if required. In our experience, leaving things to the last minute can often be at a cost to you and to the benefit of the taxman.
Still feel like you’re missing something? Financial planning can feel like a maze and getting lost is all too easy if there’s not a professional to help navigate you. Here is a simple checklist to run through to rid that feeling that you’ve forgotten a vital area.
- Personal Income Allowance
- Your Spouse or Partner’s Personal Income Allowance
- Dividend Allowance
- Pension Allowance (including the last three years)
- ISA Allowance
- Savings Allowance
- Capital Gains Allowance
- Inheritance & Gift Allowances
There are a few extra areas listed here to those considered in detail above. But such is the nature of financial planning; there’s often more to consider than first meets the eye! If you wish to discuss any aspect of the financial planning areas outlined, please complete the form below.
ContractorUK offers a FREE consultation via our financial planning and pensions partner. Complete the form below to discuss your options.