Now's the time to plan for tax-year end

Published on 19th January 2010

Whilst tax year ends on 5th April now is the time to ensure you make the most of your tax free savings allowances and take care of pension's investments.

It is always a good idea to carry out a yearly review of your finances, and what better time to do it than in the New Year and the run up to the end of the tax year. Contractors suffer enough at the hands of HMRC so any opportunities for tax benefits should be grasped with both hands. Sadly too often things are left until they are too late at the end of March so make sure you don't miss out on your chance to save on tax and take home more of your hard earned cash this year.

Dividend strategies

Given higher tax rates that come into force on 6th April it may make sense to distribute higher than normal levels of dividends now with a view to scaling this back in 2010/11.

After the new taxes begin to bite retaining profits in a limited company may allow you to effectively plan so that you defer taking this income until a time when you can envisage paying lower rates.

An offshore bond may be a useful vehicle to keep these future retained profits as it will allow the funds to benefit from potential capital growth without an immediate liability to further corporation tax.

Pensions

The income tax relief offered on contributions to personal pensions is currently up to 40% and if you're caught by IR35 or work via a PAYE Umbrella company then this rises to a whopping 48% so this offers a great opportunity for you to maximise the tax benefits with one off contributions before the tax year ends. You can also benefit from full tax relief on contributions to a pension for your children or grandchildren up to £3600 per tax year.

Depending on your salary and/or dividends over the past 3 years you you could consider using retained profits to further enhance your pension contribution up to a colossal maximum of £490,000 this tax year. Any investment that you make now could leave a worthwhile legacy for your time as a Contractor and make a significant difference to your nest-egg for retirement.

Investments

Take advantage of your annual ISA allowance by investing up to £7200 tax free (£10,200 if you are aged 50 or over). If you have not already invested up to your limit then consider putting in a lump sum; however for next year it is advisable to consider drip feeding money into your ISA to spread the risk. For Stocks and Shares ISA savers this allows you to minimise the effects of short term fluctuations in the stock market.

If you have children or grandchildren then you can also invest up to £1200 per tax year in a child trust fund. This is an easy way to start a university fund for your child or simply to put aside an inheritance for them.

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