Updated on: Jan 28, 2024
Now that we have stepped into the new tax year there are several small adjustments for contractors who have their own business and who work through a limited company to think about. This is all around tax planning and ensuring they are making the most of the tax advantages that are available. Keep in mind that over successive budgets these advantages have been diminishing but here we will cover off the main points.
Firstly, why a contractor accountant?
We have been providing accounting and tax advice to clients since 2005, and our niche area of specialisation is for contractors who work through their own limited company. These clients comply with all the usual tax and accounting rules that relate to most small businesses who operate in the UK, however there are a few key areas where the specialist knowledge of a contractor accountant can help. Back in 2005 the vast majority of our client base came from New Zealand, Australia, and South Africa. Now our clients come to us having moved to the UK from all over the world.
This specialisation is because a lot of our contractor clients do not operate as a traditional small business. They may have significant amounts of income over short periods, their company might be dormant while they are pursuing other work opportunities, they may hold high cash reserves, or it might just be a short-term gig where they don’t plan on working for more than two or three years.
As a firm of specialist contractor accountants, every client has a direct line to their own dedicated accountant and continuing on from something we started in 2005, we have a couple of fixed fee accountancy packages that our clients can choose from. And course we always keep abreast of tax changes to ensure we remain tax efficiency expert accountants.
So without further ado, let’s take a look at the key points that all of our contractor clients need to be aware of when kicking into for 2023/24 tax year.
As a limited company accountancy firm, we know that the dividend allowance has always been a very useful tax planning tool for all our clients. It’s simple to understand and easy to apply however for the 2023/24 tax year the allowance has been halved to £1,000. This means no matter how much income you have, from whatever sources, you can still pay yourself a £1,000 dividend from your limited company completely free of any personal tax.
We still have some clients who have a limited company and are currently in full-time PAYE work, and for those clients it’s useful to know they can still extract £1,000 from their company in 2023/24 without paying any personal tax. Its only a small amount but it all helps.
The corporation tax rates a changing from 01 April 2023. Whereas previously we just had a flat rate of 19%, there are now other factors to consider, and our clients may find their effective overall corporation tax rate increases to maybe 20% or 21%. Although the top corporation tax rate is now 25%, we don’t expect many clients to reach this threshold because a high level of profits is required before this rate kicks in.
Our article Corporation tax rates in 2023 covers this in detail but I just wanted to take the opportunity to point out a couple of things.
(1) Depending on your level of profits your corporation tax rate will fall somewhere between 19% and 25%. As I mentioned above, I would only expect a very small number of clients to be paying over around 21% incorporation tax.
(2) Associated companies used to be a factor several years ago when calculating corporation tax and it was difficult back then. Unfortunately, these same rules are back, and they could have a significant impact on how your corporation tax is calculated.
Salary for 2023/24
Each year as part of our accountancy services we always recommend to our clients the level of salary that will be best for the tax year. Note that this is only our recommendation and all of our clients a free to choose whatever level of salary they like. Integrated into our accounting software is a payroll module which can handle any level of salary that our clients want.
For this tax year we recommend to our clients that they take a salary of £9,096 per year, which equates to £758 per month. Now this level of salary is not the most tax sufficient option but there is a trade-off here between tax efficiency and administrative workload. Most of our clients like to reduce the amount of time they spend on admin as much as possible (so they can spend more time earning) and if a salary of more than £9,096 per year has been selected by them, then there will be PAYE/NI tax payments that they will need to make to the HMRC.
Some clients are happy to do this, however most would prefer to just pay themselves a monthly salary of £758 without needing to worry about any other payroll deductions and tax payments.
When clients are trading month to month the taxation of capital gains is very low on their priority list, and this is because normal trading operations and not taxed under the capital gains regime.
However, when a client decides they would like to finish up contracting and close their limited company then the way capital gains are taxed may become an important consideration. When a company is wound up, all surplus funds are distributed to the shareholders, and this distribution could be taxed as a capital gain.
The exact mechanics of the way this works this dependent on various conditions such as the length of the time the contractor has been working and the level of retained funds in the business. As a contractor accountant we have detailed and specific knowledge in this area because it’s such a critical part and helping our clients operate as tax efficiently as possible.
With the start of the new tax year comes a reduction in the capital gains annual exempt amount. This is the amount of capital gains you can enjoy across the tax year without needing to pay any capital gains tax. The threshold has been reduced from £12,300 to £6,000, so it is a significant reduction and will impact how we decide what the best strategy will be for you in extracting surplus funds from your business when closing it down.
Do you have a dedicated accountant?
One key aspect for a lot of contractor accounting firms (whether they are chartered accountants or not) is that each client has their own dedicated accountant to help them with all accounting requirements. This single point of contact makes communication and continuity much better. Having said that as contractor accountants ourselves, all our accountants have access to all our client records including files, emails, and telephone conversations. We do this to ensure that if an accountant is off sick, or on holiday, then we can still help all our clients where an answer is urgently required and keep up a high level of excellent customer service.
As a firm of specialist contractor accountants, the systems we have set up to handle our client data give us a very high level of flexibility in helping our clients and responding to them in a timely manner. We also have a great deal of experience in helping set-up clients who are new to contracting, and who have moved to the UK from another country. Add to this our own accounting software, and you can see that our vertical integration across most aspects of our accounting service gives us a huge advantage over our competitors and is a big contributor to why we are such a good contractor accountant firm.