Contractors, are you ready for the end of the tax year and the start of 2023/24?

As the end of the tax year on April 5th approaches, we recommend that all our contractor clients do a stock take of their HMRC affairs to ensure they have made the most of the tax efficiencies available.  

But this taking stock exercise should also be used as a chance to get ready for the next year ahead which imminently, is the 2023/24 tax year commencing on April 6th, writes Greg Timson, chief accountant at inniAccounts.

For contractor limited companies and their directors, there are three things that should be top of the list to check. These are salary, dividends, and pension.

Let’s look at each in more detail.

1. Prioritise your salary and check it’s as tax-efficient as it can be

Setting your salary for the year is your decision, but you should look at what you want to achieve (i.e. your objectives) when you do it.

For most contractors, that will invariably mean setting an income that maximises tax and National Insurance efficiencies; meets the income tax threshold, and reflects the personal outgoings and financial commitments the contractor has.

You can operate under the tax threshold, as a basic earner or higher earner but you will need to look at the implications for dividends whatever you decide. (See below section).

At the end of the year, you should make sure your annual salary objectives have been met before the last payslips of the tax year are submitted to HMRC.

Next? Make sure your tax code is right, because being on the wrong tax code could bring about unexpected tax bills!

Related, remember that everyone has a ‘personal allowance,’ which is the amount of income an individual can receive before tax is payable. This personal allowance is reflected in a tax code and for the 2022/23 tax year, most people will have a tax code of 1257L. This is based on their personal allowance of £12,570, divided by 10.

You can look up your tax code with HMRC but if you’re unsure of your position then firstly speak to an accountant. It’s always worth double-checking you are on the right code, so you don’t under or over-pay.

2. Issue dividends to minimise tax

The rallying cry at the moment from accountants like us as far as dividends is concerned is ‘Don’t miss out on the basic rate tax band’.

Most individuals can draw up to £50,270 in the tax year via salaries and dividends before reaching the higher rate tax threshold. You’ll need to account for any other income and benefits for the tax year when you review your dividends, but the most important thing is to take advantage of the threshold.

When paying dividends, remember to ensure that the dividends are covered by the profits net of expected corporation tax -- and that you leave enough cash within the business as operating capital to meet your future outgoings.

3. Top up your pension 

Directors of limited companies can contribute pre-taxed company income to a pension scheme. Subject to a few rules from HMRC, employer contributions count as an allowable business expense, which lowers the company profits and in turn means the company receives tax relief against corporation tax.

Most people can top up their pension by £40,000 tax-free each tax year. However, it’s worth noting the pensions allowance is restricted for those with an income exceeding £240,000 (this is inclusive of employer pension contributions). The allowance is reduced by £1 for each £2 of income above £240,000, subject to a minimum allowance of £4,000.

The good news is the £40,000 tax-free pension allowance isn’t a case of ‘use it or lose it.’ Provided that you were a member of a pension scheme in the three previous tax years, and you didn’t use the full annual allowance, it is possible to roll this forward to make a higher contribution in a particular tax year.

Final thoughts

Most helpful to many contractors is speaking to an accountant that specialises in the contractor market, whether it is salary, dividends or pensions (or all three) which you’d like to double-check. It’s good to have that conversation now – so you can review how you fared in the tax year on the way out, while keeping an eye on the tax year on the way in, potentially to make any adjustments that let you tax-efficiently keep more of what you earn.