We’re just a few weeks away from a new tax year so now is a good time to review your position and ensure you’re working as tax-efficiently as possible.

With rising inflation and several changes to the tax landscape due to come into force in April, our specialist team of contractor accountants is here to help you work compliantly whilst maximising your income.

What’s Changing?

Here’s a reminder of the key changes for the 2023/24 tax year, you can read our more detailed tax update article here.

Dividends

The dividend allowance is reducing from £2,000 to £1,000. Be prepared for a further reduction next year when it will halve again to £500.

Corporation Tax

Currently, a Corporation Tax of 19% applies to all company profits. From 1st April, this will change.

 

If you own more than one company, the thresholds at which the increased rates apply may be lower. Some types of companies pay 25% tax on all profits.

Capital Gains Tax

The CGT allowance (non-taxable element) will reduce from the current rate of £12,300 to £6,000. Like dividend tax, it will halve again in the next financial year, to £3,000.

Operating a tax-efficient PSC/limited company

The new tax rates are a reminder to ensure you are managing company activity tax-efficiently. The usual priority is to get money or value from your company and into your pocket with the minimum compliant tax deduction.

Most people will find this is possible through taking a small salary and taking dividends (which cost less in tax than salary but which are deducted after Corporation Tax). If you don’t need immediate access to money, the next tax-efficient thing to consider is investing into a pension.

Changes to Corporation Tax in particular mean you should:

• Check you’re claiming all allowable expenses, you can check what’s allowable with your Workwell accountant.
• Consider pension contributions (see below).
• Consider protection products like life assurance and income protection which can be paid for by your company. Life cover and income protection cover can be transferred to maintain continuity if the director spends a period of time outside the limited company (for example, if you take on an inside IR35 assignment) or if you are looking to close down your company.
• Consider setting up a Company Investment Account if you’re holding cash in your limited company, as this can help protect your purchasing power from inflation (see below).

The Pensions Question

Taken together, you and your company, as your employer, can pay up to £40,000 per year into your pension. Pensions are a tax-deductible expense and can offset company profits for the year.

Pensions give you a Corporation Tax saving which can be as much as 25% under the new rules. Of course, the disadvantage is that you cannot access your pension until you are 55 (and this age limit will increase over time).

Note the pension allowance runs from 6th April to 5th April. If you have enough reserves, you may be able to carry forward the previous three years of unused contributions and make a lump sum payment now, offsetting company profits for the year. To maximise efficiency and show the consistency of pension payments, the ‘carry forward’ can be carried out over several tax years to significantly reduce Corporation Tax for consecutive company years.

Before taking any action, take personalised advice from your financial adviser, and tax adviser.

Scenarios (credit: CCFP, one of our approved financial advisory partners)

Company Investment Account

A Company Investment Account can be a good way to protect your money from the impact of inflation. A CIA is a form of investment which is liquid and stays within the limited company. Investment timeframe is recommended as a minimum of 5 years with any profits made subject to Corporation Tax – though an effective way to mitigate this is to sweep profits into a pension.

A note of caution – a general ‘rule of thumb’ is to ensure only 15-20% of overall traded profit is generated from this type of investment activity in your company, to protect eligibility for Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief. However, this percentage is not a fixed guarantee from HMRC, so care must be taken. If you’re considering setting up a CIA, you’ll need to take specialist advice.

Helpful hints

When working on your company finances, our specialist contractor accountants advise you to think about the allowances and thresholds or bands available to you as ‘pots’.

For a typical small or micro business, the following steps are usually appropriate:

• Fill your personal allowance pot via your salary (unless you have income from elsewhere that has already used this allowance), as this is usually an allowable deduction against company profits and so reduces your Corporation Tax bill. If your total personal income is likely to be over £100k in a tax year, this would not be a tax efficient strategy.
• Take dividends to fill up the basic rate band as the tax charge is 8.75%. If you need further ongoing cash drawings, further dividends should be considered.
• Then, if you are able to allow other funds to be tied up in a pension, make contributions to a pension.
• If investing personally, don’t forget your ISA allowance of £20k as this is a tax-efficient way to save/invest.

Of course, only fill a pot if you have the resources to do so! For example, if you haven’t filled your dividend basic rate band, you can only take more dividends if you have distributable reserves available to fund these. Take into account your current and future household plans and any cash requirements.

Let us help

There’s no getting away from it, tax is complicated, especially when you’re a contractor and operating your own business. Our specialist contractor accountants are here to help you, providing tailored advice and support to ensure you maximise your income whilst working tax-efficiently and compliantly.

If you’re looking for a contractor accountant, take a look at our choice of packages or get in touch to discuss your bespoke needs. If you already have an accountant, it’s easy to switch to Workwell. Why not have an exploratory conversation with a member of our team today? Get in touch on 01923 257257, we’ll be pleased to help.