The start of a new tax year offers contractors the perfect opportunity to get their financial affairs in order.
Independent professionals are able to take stock of their performance over the last 12 months and think about potential changes they could make to ensure the next year is even more successful. To help, we have compiled four important resolutions every contractor should try and keep.
Claim what you’re owed
One of the many benefits of becoming a contractor is the ability to claim legitimate business expenses. It is essential that freelancers take full advantage of this opportunity to ensure they keep hold of as much of their hard-earned cash as possible.
As a result, contractors should be aware of exactly what they can claim for. This includes the cost of travel, subsistence, accommodation and expenses incurred when using your home for business purposes.
It is also important that contractors log everything they are entitled to, no matter how small the amount. Recent research has found that around a third of expenses are less than £10, and while this may seem like a trivial amount to keep track of, you will soon find that these costs add up.
Review what you charge
When starting out as a contractor, it is easy to set your prices too low in the hope of securing a glut of assignments. While this may yield some success in the short-term, it is unlikely to be sustainable.
It is therefore essential that contractors regularly review what they charge clients to ensure they are receiving the optimum level of remuneration. This can be done by researching what their competitors are requesting, while undertaking a thorough analysis of the market to ascertain if they are offering anything different to their rivals. Professionals with niche, in-demand skills are more likely to be able to command a higher assignment rate.
Maximise tax efficiency
Another benefit of owning a Limited company is the ability to pay yourself using a combination of salary and dividends.
Contractors are advised to withdraw a salary up to the National Insurance threshold – thereby attracting no Income Tax or NIC deductions. At the same time, the salary would be deductable for Corporation Tax purposes and also provides a qualifying year for state pension and benefits.
Surplus income could then be withdrawn by way of dividends, which incur no Income Tax while you remain a basic rate tax payer (income up to £31,785). Income Tax is payable on any amount above this threshold, charged at 25% of the net dividend withdrawn.
Limited company directors are also able to leave surplus income in the business to be withdrawn at a later date. This can be a particularly useful tactic if removing the funds immediately would result in a higher personal or dividend tax rate.
In addition, the business is able to provide an interest-free directors loan of up to £10,000 – making it an attractive alternative to traditional forms of finance. However, this amount must be paid back within nine months of the company’s year end to avoid incurring additional tax charges.
Get the best advice
By speaking to a specialist contractor accountant, such as ClearSky, freelancers can ensure that they are making the most of the perks available to them. They can also make certain they keep on top of all their administration duties, leaving them free to concentrate on sourcing and completing assignments.