Six expert tips for a successful tax year end

This blog is just one of many resources IPSE provides for those seeking guidance and support on tax as a self-employed person. 

To find it all in one place, visit our Self-Employed Tax advice page.

Self-Employed Tax

 

There are a number of key dates in the tax year for freelancers and contractors. From the self-assessment deadline to your company’s annual Corporation Tax payment and even quarterly VAT returns, a tax obligation is always just around the corner if you work for yourself.

But one important event in the tax diary that doesn’t always get the attention it deserves is the tax year end. This falls on 5th April every year and is the date on which the UK personal tax year ends, with the new tax year kicking off the following day on 6th April.

Freelancer getting ready for tax year end by making calculations


The tax year end matters because it’s when personal tax rates and allowances finish for that year end. The following day, these are reset to zero. So it goes without saying that if you want to make the most of any allowances you haven’t yet used for the year, then now is the perfect time to assess your tax position, as you have a couple of months before the end of the tax year.

With the 2021/22 tax year end creeping up, we thought it apt to share six tips for a successful tax year end, along with seizing any opportunities that may arise from it.

1. Consider your existing tax position

January is a good time to consider your existing tax position. For example, you might be close to exceeding a particular Income Tax rate, meaning waiting until the start of the new tax year to withdraw money from your limited company is a wise move.

To do this, you’ll need full visibility of all your personal income earned so far this year - whether salary, dividends or even profit earned from the sale of an asset, which may qualify for Capital Gains Tax (CGT) and also what other earnings you expect to have until 5th April.

2. Plan ahead from a tax perspective

As the tax year end closes in, it makes sense to plan ahead from a tax perspective.

Let’s say that you know that you are going to need more money next year as you plan to buy a house and that the additional amount you need will take you over a certain Income Tax threshold. With this in mind, and assuming you are comfortably within the parameters of a tax rate for the existing year, you may want to draw additional dividends before this tax year end. This means that you can take advantage of a lower rate of tax this year and thus lower the tax burden for next year.

3. Maximise your ISA allowance

Everyone has an annual £20,000 tax free Individual Savings Account (ISA) allowance. This means the most you can save into a cash ISA, a stocks and shares ISA (or both) is £20,000 before there are tax implications.

As the saying goes for this allowance, ‘if you don’t use it you lose it’. In other words, you can’t carry this allowance into the next tax year. So if you’re in a position to invest money before the tax year end, making the most of your ISA allowance is a tax efficient way to save for your future.

4. Make the most of your JISA allowance

Everyone also receives a JISA (Junior Individual Savings Account), which helps you save for your children and grandchildren up until they turn 18. The maximum you can contribute annually and tax free is £9,000. And just like your personal ISA, this allowance doesn't roll over, which is why it may be beneficial to utilise.

5. Top up your pension pot (tax efficiently)

The Annual Allowance (£40,000) is the maximum you can save into pension pots (including an employer’s pension scheme) in a single tax year before tax applies. When it comes to pensions, there are two things to consider as the tax year end approaches:

  • Like ISAs, making the most of your Annual Allowance is important. If you have a significant amount of this allowance left over towards the tax year end, you might want to make a lump sum contribution to your pension scheme.
  • Unlike ISAs, you may be able to carry forward Annual Allowance from the previous three years if your pension contributions exceed £40,000 in the tax year.

Before making any changes to how you organise your pension, it is always best to speak to a financial adviser.

IPSE Pension

6. Assess your Capital Gains Tax (CGT) liability

Capital Gains Tax (CGT) is the tax you pay on the profit amount made from the sale of an asset, whether a property (other than your main residence), your business, stocks and shares, jewellery or even a piece of art.

For example, let’s say you bought a sculpture for £20,000 and sold it for £40,000. The gain is £20,000, which you would likely need to pay CGT on.

The good news is that we each have an annual capital gains tax free allowance (£12,300 or £24,600 for married/civil partnerships)  So if you haven’t used any of your allowance already, you would only pay capital gains tax on £7,700 of the gain made (£20k - £12,300)

As with many other taxes, CGT ties into the tax year end because you might either want to sell or not sell an asset depending on how much of your annual CGT allowance you have used in the existing tax year.

Key takeaway

You’ve probably noticed, the key to navigating the tax year end successfully lies in having a clear understanding of your existing tax liabilities. With this insight, you will be in a strong position to gain from this important date in the tax calendar.

If you would like to find out more, call SJD’s Contractor Advice line on 01925 644 424, or message via their live chat function.

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SJD Accountancy
SJD Accountancy is a UK-based accountancy firm that provides accountancy services to contractors with private limited companies.