With the whirlwind that was 2020, we want to make sure you make the most out of contracting and your Limited Company accountancy services in 2021. To ensure you are prepared and ahead of the game, we have put together our top tax tips for contractors in 2021.
UNDERSTAND IR35 LEGISLATION AND WHAT THIS MEANS FOR YOU
Isn’t this responsibility moving to my hirer (end client)? Yes, this is mostly correct. Where your hirer is a medium or large company (as defined by Companies House) they will now be responsible for determining your IR35 status, but you will need to consider the effect on tax planning of working a mix of contracts both inside and outside IR35 in the same tax year.
If you work via a Limited Company and umbrella solution in the same tax year, you can end up receiving a higher tax bill if not managed correctly. It’s important that you are aware of this and have time to find a solution like hiring a Limited Company contractor accountant that can take the risk away. The Intouch Accounting solution to this is called Flex. Flex is a unique contractor accounting service built to help you simplify a very complicated process, keep control of your tax situation and optimise your longer-term financial planning as easily as you do now, so you can focus on what you love doing best. This allows you to manage the complexities of working via both an umbrella and a Limited Company in the same tax year as each other while ensuring you are as tax efficient as possible.
KEEP ON TOP OF YOUR TAX BILLS
If you’re filling in your Limited Company tax returns up to nine months after the end of the year, it is crucial you stay on top of your tax position and tax-deductible expenses throughout, from the very beginning. Once the year is over it will be difficult to put any planning measures in place, so it makes a lot more sense to plan ahead and stay up-to-date.
It’s vital that you know and understand your financial position at all times. When it comes to tax, it makes far more sense to have an idea of your liabilities ahead of time, so you can make the most of Limited Company tax planning opportunities within the relevant tax year.
CONSIDER PENSION CONTRIBUTIONS
Always think about your pension contributions throughout the year – are you happy with how much you are contributing (and how)? Do you feel set for the future?
If your personal taxable income this year will take you over the higher rate threshold, then you’ll also face a higher rate personal tax bill once your self-assessment return is prepared. Pension contributions can be a handy tool in managing this liability.
The amount you should pay into your pension depends on a number of factors, not least what you can afford and your attitude towards pensions as a means of saving in general.
Personal contributions into approved pension schemes attract the highest rate of tax relief, so they can be used to reduce your higher rate tax liability. Indeed, if you work through a Limited Company your contributions will also reduce its corporation tax liability. In both cases, the right choice of pension can reduce your overall business and personal tax bill. Our sister company, Brookson Financial or an independent financial adviser, will be able to advise you on your options.
INCLUDE THE RIGHT CONTRACTOR EXPENSES
Most of the time business expenses are incurred, recorded in your company accounts and then paid out in the same tax year. However, around the end of the year, time delays can mean this is not the case.
Business expenses claimed after the financial year ends still attract tax relief but you may have to wait a year to receive it. Make sure you regularly submit your expense claims, especially close to the year-end, to avoid any big delays
Dividends are only taxed when they become payable to you personally and, as a director, you have control over when you pay them. This means you can manage both the timing and the amount of your personal tax liabilities. If your income level drops, it could be a good idea to wait until the next financial year before taking profits from the company.
Think about the total dividends you take from the Limited Company across the year as a whole. If it’s likely to take you over the higher tax rate threshold, it might be worth holding off taking any more until the next financial year if you can afford it.