Top tax year-end tips for contractors as 2023-24 ends and 2024-25 dawns

As a contractor if you don’t have April 5th etched in your memory as an important date then you’re definitely missing out, writes Angela James, financial adviser at Yolo Wealth.

This is the date that the tax year ends, and all allowances reset for the coming year, so should you wish to take advantage of ways to utilise allowances then you must do so before this April 5th cut-off. A single day later, April 6th, when the new tax year begins, will be too late!

As a busy professional, other priorities can often take precedence for contractors but here are some frequently asked questions around the end of the tax year; the answers to which could help you not wrongly relinquish too much of your hard-earned money to HMRC!

What is an Individual Savings Account, and how can an ISA benefit me as a contractor?

As a contractor you will very often be in, or close to, the higher rate tax thresholds while in most cases maximising your dividend allowance.

Well, an ISA will offer you a tax-efficient haven for any leftover savings, meaning that you can receive gross interest or returns on your funds. Better still? Using an ISA will not impact your other income allowances.

ISAs can be a cash-based, or investment based, or a combination of the two. They also offer a great source of income in the future, because the funds within can be withdrawn with no income tax to pay.  

Is a flexible ISA best for you (especially if you’re an umbrella company contractor)?

We’ve seen recent legislative changes to ISAs, one being the new flexible ISA.

A flexible ISA is available for cash or investment. Should you be holding your important contingency savings as personal savings, perhaps more so if you are an umbrella contractor, then this new flexibility means you could now have ISAs as a consideration for your emergency funds.

A flexible ISA would mean you could withdraw from the ISA and replace the withdrawn funds without affecting your allowance within the tax year. With rates a higher level than they have been for some years, you could see your interest on your savings falling into the taxable trap and ISAs provide a good solution to this potential issue.

What is my pension allowance?

Every UK taxpayer has an allowance each year of up to £60,000 (since tax year 2023/24), and previously this was just £40,000. Not to unnerve contractors, but there is a feeling that this allowance was increased as a sweeter or offset for tax increases to come.

In fact, how long the more generous allowance of 60k will remain intact is unknown. So it’s important to take advantage while you still can – particularly as Spring Budget 2024 has been confirmed for March 6th 2024.

So a maximum of £60,000 can be invested into a pension from April 6th 2023 to April 5th 2024. Better still? In some cases, this maximum allowance could be even higher if you have ‘carry forward’ options available to you.

For contractors and the self-employed, ‘carry forward’ can be a particularly useful way to use income that you have been reluctant to draw due to increasing your income tax liabilities. Or if you are using an umbrella company for your inside IR35 contract, it represents a very advantageous allowance, that would not only reduce your tax burden but also reduce your national insurance bill, if invested in the right way.

For business owners (who also need to have an eye on their own company’s year-end) the carry-forward model is particularly beneficial to reduce corporation tax liabilities – albeit, again, before the tax year runs out on April 5th!

What is carry-forward in a pensions context?

The ‘carry forward’ model could allow you to go back three years and gives 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. Other eligibility criteria applies.

When do I become a higher rate taxpayer?

You become a higher rate taxpayer when your annual income from all sources equals £50,270 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 33.75%.

Be aware, the tax threshold now likely to affect umbrella company contractors is the significant reduction to the additional rate tax band. From this tax year (2023/24), the threshold was lowered from £150,000 to £125,140. That’s almost 16.5% cut in one fell swoop, and we will see more contractors now falling into this 45% tax. It is estimated to affect around 792,000 taxpayers.

What about the new dividend allowance?

The tax-free dividend allowance is £1,000, reducing to £500 for the coming new tax year 2024/2025 (commencing April 6th 2024).

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 CGT on disposal. This is sometimes considered a ‘forgotten’ tax; you have an annual allowance available of £6,000 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.

Be aware, this CGT annual exempt amount has been reduced significantly in the last few years and is set to further reduce to £3,000 for the new tax year (2024/25). It’s therefore vital that if you have assets you are considering realising that you review your options before the end of the tax year.

So, what do contractors need to do before April 6th?

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 use or should be using any allowances. In many cases, if you don’t use it -- you lose it.

· 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, I am qualified and ready to assist you, so please visit: Yolo Wealth

Please note: 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.

Approver Quilter Financial Services Ltd & Quilter Mortgage Planning Ltd 12/02/2024.