Being efficient with your tax
Contractors are known for being hard workers. Thus, you will want to make sure that you don’t have to pay more tax than you legitimately have to. By engaging the services of an experienced contractor accountant who can help you with accounting and tax planning, you will be in the best position to maximise your take-home pay.
This article examines how you can make withdrawals from your business that may help reduce your tax burden.
Claim for legitimate business expenses
Expenses that you incur during the running of your business, that are intended for the sole use of the business, can be offset against the company profits, which in turn reduce your Corporation Tax bill.
In order to claim for these expense’s, you must keep accurate records, such as receipts and invoices.
The most common types of legitimate business expenses include:
Travel – you can claim for the mileage you cover travelling to and from your client’s office. You can also include parking and congestions charges as well. Train travel is another big expense a lot of contractors have.
Subsistence – you can claim for meals and refreshments you purchase whilst working with a client.
Hotel stays – if you work away for a client you claim for the cost of staying in a hotel or B&B.
Computer hardware and software – you claim for IT equipment if it is intended for the sole use of the business.
Eye tests – if you use a computer for work, you may be able to claim for the cost of an eye test.
A full list of expenses and rounds around claiming can be found in our essential guide here.
Payroll and dividends
If you take a salary up to your Personal Allowance (currently £11,500), you won’t be subject to Income Tax. However, you will still be subject to National Insurance Contributions on income above £8,164.
You can also withdraw money from the company via dividend payments. Dividend payments can be made after deducting Corporation Tax (currently 19%) from the company’s profits.
Using this method of taking a small salary and the remainder via dividends means you generally pay less tax compared to solely taking a salary. Our article, ‘Salaries and dividends – how to make the most out of your limited company’ covers this in further detail.
Maximise your company pension money
If you are looking for an easy way to save tax, putting money into a pension scheme is one way of achieving this. Plus, by paying into a pension scheme you helping to secure your own future, for when you do decide to take retirement.
Paying into a pension scheme will either reduce Corporation Tax payable on the company profit (and dividend tax on income) or you’ll receive income tax relief on your personal contributions, depending on which scheme you choose.
Stay outside IR35
Understanding the complex rules that surround IR35, or the Intermediaries Legislation, as it is often referred to will help you to work as tax efficiently as possible.
We discuss IR35 and its impact on contractors in our article ‘IR35 advice for contractors.’
Review your VAT situation
If you are VAT registered, it is advisable to periodically review your VAT scheme. Depending on which scheme you are using, you may be better off using an alternative.
This has become more relevant since the changes to the VAT Flat Rate Scheme were introduced on 1st April 2017.
For further advice and guidance on how to be efficient with your tax, please contact us on 01962 867550, or send us a message via our website.
Note: All the information and advice in this blog post was correct at the time of writing.
