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.
Pay into a pension.
Paying into a pension is a win-win when it comes to tax. Any money you set aside for a pension is excluded from the profits of your Limited Company. This means that, just like expenses, you won’t pay tax on anything you set aside for a pension. As well as reducing your tax bill, you are also setting aside money for your future – extremely important when contracting, as you won’t have an employer or anybody else saving for your retirement.
Work Outside IR35.
IR35 is legislation designed to stop contractors in ‘disguised employment’ – that is, acting as an employee while operating through a Limited Company – gaining tax benefits not available to actual employees. Taking contracts Outside IR35, or renegotiating the terms of your contract to make sure you don’t fall foul of IR35, can potentially put thousands of pounds into your pocket. If you are unsure where you stand regarding IR35, check out our introductory guide – and if you are not sure how your contract should be categorised, we offer a comprehensive IR35 review to guarantee you peace of mind.
Use a specialist contractor accountant.
Unless you are an experienced accountant yourself, running every aspect of your own Limited Company will be far more trouble than it’s worth – and there is less guarantee of everything being done correctly! Appointing an accountant is therefore a necessary step when going Limited. But not all accountants are created equal – a general-practice high street accountant will deal with a wide range of clients and different jobs and so their expertise is spread thinner. A specialist contractor accountant will only deal with contractor Limited Companies, so each accountant is an expert in situations just like your own.
We hope you’ve found this guide useful. If you need any more information or are interested in appointing Dolan Accountancy as your expert contractor accountant, give us a ring on 01442 795 100 or email firstname.lastname@example.org.