Tax Planning Tips for Self-Employed Contractors

Having worked with self-employed contractors across London for many years, we understand that you’ve got a lot on your hands juggling your business operations and financial responsibilities. When it comes to tax planning and reducing your tax obligation legitimately, your busy schedule often means that this is an afterthought and as such can fall by the wayside, leaving you in a difficult position come the end of the financial year.

This is why Tax Agility exists, we’re here to help contractors like yourself maximise your tax returns and increase your contractor business’s profitability. We do this providing tailored advice that suits your business and your industry. In this article, we aim to discuss the top five tax tips for self-employed contractors that you should be aware of with respect to both your day-to-day and long-term operations.

Top 5 tax-planning tips for self-employed contractors

1. Take IR35 seriously

Perhaps the most helpful tip we can give to a self-employed contractor, recognising where you are in relation to HMRC’s IR35 legislation is of the utmost importance at all times. Understanding how to navigate IR35 with respect to your classification and categorisation as a contractor or potentially as a ‘disguised employee’ could mean the difference between a huge increase in tax payable to the government, so taking IR35 seriously is imperative.

On our ‘What does the IR35 legislation mean page, as well as in our ‘What’s IR35? A brief guide to the IR35 legislation’ post, we cover IR35 extensively including what it is, why it was introduced, how it might impact your taxes and how to tell if you’re at risk. The main point is, if HMRC believes you to be operating under IR35, in other words, they consider you as a ‘disguised employee’ rather than a genuine contractor, then you will be required to pay back the underpaid tax or have to pay a penalty and interest. It also means that your current contractor tax planning structure and methodology will need to be re-evaluated.

Getting IR35 right the first time is important because HMRC doesn’t give you the benefit of the doubt, so speak to one of our experienced accountants for contractors if you aren’t sure if you’re inside or outside of IR35.

2. Becoming a Limited Company

Assuming the services that you provide don’t fall inside IR35, incorporating your contractor business as a limited company is an effective way to pay less tax while simultaneously growing your business and boosting its profitability. The main reasons are:

  • With a limited company, you can split your income between salary and dividends. Dividends aren’t subject to National Insurance Contributions and also taxed at a lower rate, resulting in you paying less taxes legitimately.
  • You can claim tax relief on legitimate expenses.

In short, incorporating a limited company is the most popular means of establishing a self-employed contractor business, mainly due to the significant financial benefits it affords the business owner.

Establishing a limited company does have its drawbacks, however, and brings with it a number of responsibilities and administrative necessities that non-company owners wouldn’t normally be required to fulfil. They include accurate record keeping, quarterly submission of accounts and annual returns, as mentioned on our ‘Managing a Limited Company page. The good news is, the teams at Tax Agility can help to alleviate the stress by managing your bookkeeping, payroll, VAT returns, and completing annual returns.

3. Consider the VAT Flat Rate Scheme

The Value Added Tax (VAT) Flat Rate Scheme allows contractors who have an annual turnover of £150,000 or under (excluding VAT) to pay a fixed amount of VAT based on their turnover. This can be beneficial in circumstances where contractors don’t have the time or manpower required to add up every taxable purchase to produce an exact VAT amount, instead paying a fixed rate of VAT to HMRC and keeping the difference between what you charge your customers and what you pay the Government.

As with most of the tips in this list, the VAT Flat Rate Scheme isn’t for everyone, so speaking with your accountant is advised to gauge whether this scheme is suitable for your business structure.

4. Take advantage of the Annual Investment Allowance (AIA)

The AIA, which is currently set at £1,000,000 between 1 January 2019 and 31 December 2020, allows you to deduct the full value of a qualifying item from your contractor profits before tax.

There is a large number of exceptions here, including cars and any item that you previously owned before using it for your contractor work, as well as items given to you or your business (i.e. not specifically purchased).

You can find out more about AIA on this page or speak to us if you want to take advantage of this allowance.

5. Submit everything on time

In the same manner that not taking IR35 seriously can make your professional life difficult, not submitting your tax returns on time can also add stress, and even harm your tax planning efforts due to the penalties you’re likely to receive. This is why using a cloud accounting platform and having an experienced accountant working alongside with you are imperative.

With Making Tax Digital now effective for VAT-registered businesses earning above the threshold of £85,000, and soon to be applicable to all businesses regardless of structure, size or industry, transitioning to a cloud accounting platform is an efficient and effective way to streamline your finances and ensure that you provide HMRC and your accountant with all of the necessary data and information required, well in advance of the filing date.

Experienced accountants for contractors

To speak with a professional, specialist contractor accountant to discuss more tax planning tips for self-employed contractors like yourself, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.