The Limited Company Contractor’s New Year Resolutions: 2017
It may not have been that long ago since we were all looking forward to the festive break, but 2017 is already gearing up to be a year of change and adaptation for Limited Company contractors. As experts in contractor accounting, it’s our job to ensure our clients are prepared, and understand what’s to come, especially this April and tax yearend.
Until then, these ebullets outline our top 5 contractor New Year’s Resolutions, to help you start your year off on the right foot. With several things to consider and possible changes you can make, we hope you find it useful.
This, of course, is just the beginning! In the next few months we will go into more detail about the aspects of contracting that are going to change or develop in the near future, to help prepare you for yearend – and beyond.
Let Intouch be your expert guide this New Year, and make your life richer.
Good contractor habits for 2017
New Year’s Resolution 1
the perfect time to banish bad habits and make some new rewarding ones. We kick-start our New Year’s resolutions off with some easily achievable habits, to check you’re not missing out on any opportunities available to you
Ensure you make the most of your ISA allowance
SAs offer you opportunities to obtain tax-free income and gains, and are an excellent investment for higher rate taxpayers. For 2016/2017 the maximum allowance is £15,240, and the Junior ISA allowance is £4,080.
The Personal Savings Allowance
Anyone aged 18 or over can earn up to £1,000 a year on their personal savings, taxfree. See below for how you can benefit:
- Basic rate taxpayers (20%) – can earn £1,000 interest without tax
- Higher rate taxpayers (40%) – can earn £500 interest without tax
- Additional rate taxpayers (45%) – are excluded
Have you taken up to £5,000 of tax-free dividends this tax year? Any dividends taken over this limit will be taxed depending on the level of your income and between 7.5% and 38.1%.
Also consider your dividend paperwork. You must ensure that you correctly complete a dividend voucher each time you pay yourself a dividend. Each voucher must show:
- Your Limited Company’s name
- Your shareholder(s) names that are being paid a dividend
- The amount of the dividend
- The amount of the ‘dividend tax credit’
By including the ‘credit’ your company and shareholders won’t have any tax to pay out when the dividend is paid. Individual shareholders may still have to pay tax on the amounts they receive, depending on their overall annual income and the tax band they come under
Increase your skill set and potentially your day rate
Find out about the skills that are in demand – Speak to fellow contractors, explore the jobsites or take to the forums to see if there are any trends for specific skill sets.
Update your skills – Consider updating your existing skills. Remember if you are on the Standard Rate VAT you can claim VAT on any training you undertake to update skills, however, if you are registered on the VAT Flat Rate Scheme you are not able to do so.
Promote yourself – Update your CV, LinkedIn profile and / or your company website to showcase your latest skills, recent contracts, testimonials and upcoming availability.
Adding your spouse as a shareholder
New Year’s Resolution 2
Will adding your spouse as a shareholder increase your overall take home pay? In this resolution we outline how it works and whether you could benefit.
Did you know?
By adding your spouse as a shareholder of your Limited Company, you are able to allocate dividend income to them, as long as you are contracting outside of IR35. There are opportunities to create flexible and practical shareholdings between married couples.
How does it work?
To begin with, your spouse must own a percentage or class of the shares of your Limited Company. Once a dividend is declared from your company’s profits, the shareholders (you and your spouse) will receive a percentage of that dividend payment, or the full amount where different classes are held that’s relative to your shareholdings.
Can adding your spouse maximise your take home pay?
If your earnings are above the higher rate tax (HRT) threshold (40%) and your spouse’s fall within the basic rate (20%), potentially there is scope to even out the dividends being received and minimise your higher rate tax liability.
So instead of taking £60,000 in dividends for you personally, you could both be 50% shareholders and therefore receive £30,000 each which would keep both of you within the basic rate of tax.
As long as your total gross income (including income from any other source, such as rental income for example) is no more than £43,000, you can stay within the basic rate of tax. This is applicable to your spouse too.
It’s worth also remembering that whilst the dividend rate tax bands increased this year, the ability to take the first £5,000 in dividends tax-free was also introduced. Therefore, if you have not already drawn dividends this current tax year (06/04/16 – 05/04/17) then we would recommend doing so to at least the £5,000 tax-free limit.
It’s easy to get confused between percentages, and where different classes of share exist, so make sure you understand who holds what before you declare dividends. It’s also easy to forget to complete the paperwork required to ensure payments are treated as dividends.
Speak to your Personal Accountant
Got questions about dividends? We advise speaking to your Personal Accountant about how involving your spouse could mean more take home pay.
Planning and protecting your retirement
New Year’s Resolution 3
Have you planned for your retirement? Whether the answer is ‘yes’ or you’re looking to put a plan in place, now is the time to protect your future plans.
Why January is the perfect time to consider your retirement
Right now, in the thick of January to-do items, retirement probably feels a long way off. When you’re focused on the job in hand, or perhaps looking ahead to the next contract, planning for a distant retirement can seem like a low priority. However, if you’re unclear about how your finances will look when you retire, it’s important to start thinking about it as early as possible.
With average life expectancy gradually increasing, the likelihood of a lengthy retirement is also increasing. This makes it more vital than ever to plan financially for the retirement stage of life. As a contractor you are already enjoying the flexibility of choosing how you want to do things more than you ever did as a permanent employee, and it’s no different when it comes to retirement. You’ve got the freedom to plan ahead for when you’d like to retire, and whether you want to cut down your hours over time or stop straight from full time.
Are you on course to retire when you choose, with the pension you want and deserve?
If you haven’t already been following a financial retirement strategy, you don’t currently know whether you’ll have the money available to retire at the time you anticipate and with your desired lifestyle, whatever that looks like.
Planning and protecting your retirement
It’s time to consult with an Independent Financial Adviser
By speaking with an adviser (usually an Independent Financial Adviser) and formulating a plan, you can ensure that your pension pot looks as healthy as possible when the time comes. Only you can decide how long you want the income to last once you have retired, and how you would like to spread the money.
Of course you can’t prepare for every eventuality, but by planning early on you give yourself the best chance of enjoying a comfortable and happy retirement. Your strategy can also ensure that, even if you do find yourself between contracts for some time, there is still enough in the pot overall for you to be confident about your plans.
An adviser can discuss your full circumstances with you to work out a detailed plan, including a consideration of the tax implications, so you can know that your retirement is protected.
Protect yourself – both in business and your personal life
New Year’s Resolution 4
Do you know if your responsibilities would be taken care of, should anything happen to you? It’s time to check you’re covered, both professionally and personally.
We all have responsibilities
Be it a mortgage, a family to support, or financial obligations, almost every contractor will have responsibilities both inside and outside of their Limited Company. So what would happen if you had a claim made against you, you were injured and unable to work, or worse?
Hopefully you’ll already have a plan in place, but if not, take a look below to see the types of things you need to consider:
Should a client make a claim against you for negligence (such as giving poor professional advice or accidental loss of data or documents) you could be facing a large compensation bill.
Professional indemnity insurance will cover any compensation you have to pay the client, plus any legal fees you may have to pay in the process. It will also cover you for defending yourself, even when you’re in the right, as you could still incur costs in doing so.
Should you accidentally damage your client’s property or cause injury to third party persons, then public liability insurance will have any legal fees and compensation to the claimant covered.
A claim could be made against you for something as simple as spilling a cup of coffee over a computer belonging to your client, or someone tripping over a bag you leave in a walk way
Occupational Personal Accident Cover
Whilst the other insurances listed help protect you in a professional capacity, occupational personal accident cover is there for when the unexpected happens that is life changing.
Should you have an accident at or on the way to work and are unable to continue to contract for a period of time, this insurance covers you, ensuring a monthly amount is coming in to help you pay for the things you really need.
In the worst case scenario, it’s important to know that your family and / or financial obligations are looked after in your absence.
This is a legal responsibility for almost all UK businesses and is often insisted upon by clients. Even if your only employee is your partner or spouse working in an admin or clerical role you will require this insurance. It will also allow you to hire a substitute to complete your work if you are unable to do so.
Directors’ and Officers’ Liability
Should your Limited Company be accused of financial mismanagement, a legislative breach, a health and safety failure, or of breaching company law, then your directors’ and officers’ liability will cover you.
Who do we recommend?
As one of our preferred business partners, we advise all clients to speak with Kingsbridge contractor insurance.
With over 30,000 contractor clients, Kingsbridge understand your needs and how you could be affected. Get a quote today and find out how their cover can give you and your family peace of mind this New Year.
Other things to consider
There are also other areas you should consider when it comes to ensuring you have the correct cover in place. These include life cover, permanent health insurance and private medical cover.
We will be exploring these areas further this New Year, so keep an eye out for our exclusive advice on how to protect yourself further from the unexpected.
Spending vs investments – what’s best for you this New Year?
New Year’s Resolution 5
Are you making your cash work as hard as possible for you? Ensure you’re doing everything you can to make the most from what you have.
Do you have money in ISAs or other savings?
News outlets last year made much of the reports that interest rates for UK savers were at an all time low. The Financial Conduct Authority reported in July that interest rates for some cash ISAs were as low as 0.1%. If you are amongst those who have cash in current accounts or cash ISAs, you probably know already that you’re not getting much return on that money, and that’s even more painful if it’s a large sum.
It goes without saying that, especially if you’re stockpiling a large amount of cash, it’s not working very hard for you by sitting in an account earning zero or minimal interest. So what can you do about it? The main aim here is to put some thought into your options and make your cash work harder for you. After all, you’ve worked hard for it, so why not get the most out of it in return?
What are your options?
You’ve got several different options, and the most productive route will be speaking with an adviser who can discuss your situation and plans for the future, and suggest the most efficient path for you. Obviously a big consideration will be how much money you can afford to set aside, and over what period of time, so this is worth some thought.
Starting close to home, you might choose to overpay or pay off your mortgage, saving you huge sums in interest, though keep in mind that some providers may charge penalties for certain levels of overpayment. As we have mentioned elsewhere, you could also look into contributing more to your pension pot, which both safeguards your future and offers certain tax benefits.
What else is there to consider?
Depending on your circumstances and the level of risk that you are comfortable with, other popular options might include fixed rate bonds, investing in stocks and shares, and buying buy-to-let property. It is also worth considering how you could spend your hard earned cash outright on things like training and qualifications. Always worth it as investment into yourself, consider how you could spend money to upskill and drive up both your employability and your day rate.
Whether you’ve already got a plan in place and just want to check it’s 2017-proof, or want to start planning from scratch, your Personal Accountant is there to advise you on how to achieve your goals. Tailored to your personal circumstances, both now and in the future, your Personal Accountant will be able to advise on whether spending your assets now will benefit you versus investing for the future.
Speak to us today about how we can help you be a contracting success.
Phone: 01202 901 385