New Tax Year for Contractors: What Do You Need to Know?
The start of a new financial year brings with it new financial rules. It’s crucial that contractors are aware of these key changes in order to know exactly how their business will be impacted – and how they can make their money go further. As contractor accountants, we’ve been helping individuals deal with the changes that often accompany a new tax year for a long time, and can help you to quickly adapt to this ever-changing financial landscape.
Have a look at what’s different in the 2019/20 tax period, which began on 6th April 2019, and how these changes can affect the way you work – either in a negative or positive way.
Changes to Your Personal Allowance
Starting with a bit of good news, with the new financial year comes an increase in your personal allowance, which is raising your tax-free income. You can now earn £12,500 before you start to pay income tax while, before, this figure was £11,850. The Basic Rate of income tax is payable on income you earn between £12,501 and £37,500; the Higher Rate, after which you’ll have to start paying 40% of income tax, increased from £46,350 to £50,000.
As a limited company director, you have more flexibility over how and when you get paid. If you’re not caught within IR35, you are likely able to draw income in the form of dividends and a small salary. This comes with a tax benefit – dividends are not subject to National Insurance contributions while salaried income is. If you wish to optimise your efficiency as a limited company director, the best combination of wages/dividends you can use in the 2019/20 tax year is to have your company pay you a salary of £8,632 and dividends of up to £41,368.
We can help you to learn more about this new change, so just get in touch with Gorilla Accounting today. Alternatively, you can also calculate your take-home pay with our contractor tax calculator immediately.
What’s Different with Your Pension?
On a more positive note, while there isn’t any big news with personal pensions, the little changes introduced in the new financial year are certainly looking good for contractors. You still have an allowance of up to £40,000 per year which you can combine with a limited company for up to £7,600 Corporation Tax relief. You also have the option to carry forward a few of your ‘nest-egg’ builders, so you may have higher contributions, and your pension will still remain a tax-free way to remove cash from your limited company. When it comes to your lifetime allowance for pension savings – meaning the amount you can draw without paying an extra tax charge – it’s now £1,055,000, while before it was £1,030,000.
Company Tax Rates, VAT, AIA and NICs
Your corporation tax rate is currently still set at 19% for the 2019/20 year but will change in the next tax year, as the government plans to reduce the rate to 17%. If you choose to have a contractor accountant to help you set up your limited company, you can also rest assured that they can register it for corporation tax after it’s been incorporated.
Standard, reduced rate and zero rate Value Added Tax (VAT) remains the same. VAT is applied to all services you provide to your clients, meaning you can reclaim it on purchases made via your company. You will need to submit an online VAT return to HMRC for the tax year of 2019/20, you only have to register for VAT if your annual turnover is £85,000 or more; however, we recommend that you register anyway, as you may be able to benefit by joining the Flat Rate scheme, which offers a discount for companies in their first year of trading.
When it comes to your Annual Investment Allowance (AIA), as a company you will be able to claim £1 million as AIA for expenses incurred between 1st January 2019 and 31st December 2020 on fixed assets like machinery and equipment.
As for National Insurance Contributions (NICs), all limited companies will have to pay Class 1 NICs on income received above the lower rate threshold. This means that you will have to pay Employers’ National Insurance at a rate of 13.8% if you own a limited company and your weekly salary is £166 or more. Your dividends are free from these contributions.
Contractors who operate through an umbrella company will also pay Class 1 NICs, which will be deducted automatically by the company itself. If, on the other hand, you’re self-employed and don’t own or operate through a company, you’ll have to pay Class 2 and Class 4 NICs on your annual wages. This tax year, the rate for the Class 2 contributions is set at £3 per week if you earn over £6,365 a year; as for the Class 4 NICs, a 9% rate is applied to annual profits between £8,632 and £50,000 (and 2% if you earn more than £50k).
Contractor Checklist for the New Tax Year
At Gorilla Accounting, we have put together some planning tips to ensure that you’re ready to benefit from the changes the new tax year brings. They will also help you to stay ahead in the contracting game – growing your business is challenging enough, so the last thing you need is to worry about the financial side of it as well.
Claim All of Your Expenses
Make a promise this new tax year to learn more about what you can and can’t expend – and don’t forget to claim all that you’re owed. Whether you’re just starting out as a freelancer or a contractor or already have a few years of experience, claiming expenses will help you to keep your business running and to maintain its cashflow. In addition, when you have a deep understanding of what you’re allowed to expend, you can then report a lower profit, which will reduce the amount of tax you pay. From software and computers to uniforms and travel, ensure you know what counts as a business expense.
Pay Yourself Fairly
Let your wages reflect the new 2019/20 tax changes. It can be easy to carry on working and not take a moment to revise your rates, but it’s important that you take inventory of your projects and upcoming work. Are you selling yourself short? Could you be charging more? Getting paid fairly is crucial to keep your business afloat and to keep your motivation up – you may find it easier to quit or lose motivation if you don’t feel you’re making enough money to cover your living expenses, for example.
Remain Organised All Year
With the introduction of Making Tax Digital, it’s easier than ever to keep all your document in one place and know the current state of your account at all times. FreeAgent bookkeeping software, which we offer at Gorilla Accounting if you take on our services, will ensure that you remain organised throughout the tax year, submit your returns on time, fill out all the necessary documents, view important files in real time, and more. This cloud-based software will also help you to stay more productive, as you won’t have to spend time going through all your documents by hand, allowing you to focus on your business.
Take a Break
Freelancers and contractors know they need to work very hard to build and grow their business; for this reason, many end up spending all their time at their desks – or at a client’s site – working away without taking a moment to themselves. Not only is it important for you to step away from work for a while and get out more, but you should also schedule in more holidays throughout the year. This will give you something to look forward to as well. After all, you became a contractor to be your own boss and be able to take time off whenever you want; don’t neglect the balance between your professional and your personal lives.
You can also take a break from work to attend important industry events, whether to network, meet like-minded people or even to promote your business. A change of pace and scenery can help you to remain productive and motivated.
Improve Your Skill Set
Boosting or updating your skills can be beneficial to your work as a contractor. You can take on more exciting projects by being able to offer new services, for instance, and you will also be able to charge more. To maintain your marketability, learning new skills and developing your current ones is of the utmost importance as well – markets move at rapid speeds, so you will need to stay relevant. Therefore, identify learning opportunities and ensure continued professional development.
Get an Accountant
We understand why you’d want to go at it alone, as taking control of your business in its entirety is very appealing. However, because you will have to work hard to build and expand your business, having to stop and learn how to handle your accounts – as well as having to put your contracts to one side while you deal with your taxes – will be incredibly time-consuming. Keeping on top of important tax deadlines will be an added stressor too, especially when you really need to finish a client project.
Getting an accountant will allow you to be tax-efficient and concentrate on your contractor work instead. Additionally, accountants such as our specialists here at Gorilla Accounting will ensure that all of your paperwork is filled and submitted correctly. Submitting wrong information to HMRC can be costly in regard to fees and penalties, but this can be avoided by having a professional handle your finances.
We’re always on hand to answer any questions you may have about the new financial year and the changes it brings to contractors, so don’t hesitate to talk to us at any time. You’ll have your own dedicated accountant and unlimited support, as well as the expert opinions of a team with decades of experience.