However, there are many subtleties to the UK taxation system and we are of the opinion that nobody should pay more tax than they are required to. With that in mind, we’ve put together this guide so that you can ensure you are not overpaying.
Operate through your own Limited Company.
Many contractors choose to operate through their own Limited Company, particularly those on higher rates and longer-term contracts. Although it’s not for everybody – check out our guide to the advantages and disadvantages – it is a decision that can pay for itself many times over in the right circumstances. Income can be split between salary and dividends, taking advantage of additional tax allowances not available to the self-employed. You can also plan for National Insurance contributions, offset tax against pension contributions, take advantage of the Flat Rate VAT scheme and importantly, claim tax deductible expenses – which brings us on to our next point.
Know what expenses you can claim.
Any costs you incur in the course of your contract can be offset against your company’s tax liability. In plain English, this means that if you spend, say, £500 on travel for a contract, you won’t need to pay tax on £500 of your income over the year. Many contracts involve travel, accommodation, meals, training and many additional costs – keeping proper records and knowing what you are entitled to claim can keep thousands of pounds of income per year out of the taxman’s pockets and put it into yours. For an in-depth guide to contractor expenses, check out our introductory guide.
Avoid late payment and late filing penalties.
One of the potential pitfalls of operating your own Limited Company is that your payments to HMRC and the filing of your company accounts, payroll submissions and VAT returns, need to be done in a timely manner. These penalties rise the later you pay or file – so keep on top of your deadlines and make sure you have money set aside to settle your tax liabilities. Of course, a good contractor accountant will know your deadlines and ensure you have all the information needed to meet them.