In the run up to every tax year end, there seems to be the same mad rush to make use of the available financial planning exemptions, allowances and reliefs before it is too late. This can be particularly true for contractors who may not know what their actual earnings are going to be until closer to the end of each tax year. However, there are plenty of things you could and should do early each tax year in order to take the stress out of your financial planning.

Here are our top 5 tips to getting off to a great start in the new tax year:

1. Plan Your Income

A contractor who operates their own limited company is fully in control of how they pay themselves. Effective planning of salary, dividends and any benefits can ensure you are highly tax optimised for the year ahead.

2. Make Use of Pension Tax Relief

When a contractor makes contributions from their company into their personal pension, they are typically treated as an allowable business expense. As a result, you won’t have to pay Corporation Tax on them. Nor will you have to pay employers’ National Insurance or Income Tax on the contribution.

For every £1,000 paid by your limited company into your pension, your Corporation Tax liability is reduced by a minimum of £190! With the annual allowance for contributions increasing to £60,000 per annum and the removal of the lifetime allowance, pensions are an increasingly attractive way to save for your future.

3. Safeguard Your Income

Many of the contractors we work with were once in an employed position. Normally, they had the peace of mind that if they were unable to work due to sickness, or accident, they would continue to receive some form of “sick pay” so that their bills would remain paid and they had the time they needed to recover.

Contractors can replace this safety net when they branch out on their own with an executive income protection policy. They are considered an allowable business expense, so are tax deductible for the company and the premiums paid do not attract Income Tax or National Insurance for the employee. Individuals can cover up to 75% of their typical remuneration, as well as any regular pension contributions they make and employer national insurance liabilities.

4. Make Provisions For Your Loved Ones

As with “sick pay” many contractors who were once employed are likely to have benefited from death in service cover, which would have paid a lump sum (normally a multiple of their salary) to their loved ones if the worst were to happen to them during their working life.

Just like sick pay this can be replaced by contractors taking out a relevant life policy. This is a life insurance policy, paid for by the contractor’s limited company.

The relevant life policy is written in trust, so any money paid out goes directly to your loved ones, not your company. The policies are a business expense, benefiting from Corporation Tax relief and do not give rise to an Income Tax or National Insurance liability for the contractor.

5. Save The Tax Efficient Way

If you have surplus personal cash reserves it can be extremely beneficial to use a Stocks and Shares ISA to make sure your cash is working as hard as you are.

At present you can invest up to £20,000 within an ISA each tax year and the real benefit is that you don’t pay UK tax on any profit the investment makes. This means no reporting on your tax return.

Sam Johnston, Financial Consultant from Penney Financial Partners said “Like most things in life, leaving your financial planning until the last minute can cause unnecessary stress. Even though contractors can sometimes have irregular income, there are several key principles, like those listed in this article that remain constant.”

For further advice, why not speak to one of our fully qualified accountants on 0207 096 2659 or email christian@integroaccounting.com.