What are the benefits of contracting?
Regardless of which industry you are in, there are many advantages and benefits of becoming a contractor.
The main benefits of contracting include:
- Financial benefits: as a contractor, your average rate could be substantially more than that of a typical permanent employee. Contractors are paid highly due to their skills and the flexible nature of their role, which is predominantly short-term.
- Greater freedom: contracting allows you to work when you want, where you want and for how long you want, and changing contracts is often far easier than changing permanent positions.
- Increased flexibility: contract roles have more flexibility with regard to agreeing to working conditions and negotiating payment terms.
- Broader experience: as a contractor, you will have the chance to work across multiple projects and roles in many different companies, thereby increasing your own skill set, experience and exposure to various workplaces.
And if you choose to contract through a Limited Company, there are further benefits:
- More money: a limited company is the most tax-efficient option for contractors – by combining a low salary with high dividends, and claiming all legitimate business expenses, you can maximise your take-home pay.
- Better tax planning: operating through a limited company provides greater tax planning opportunities – with a lower salary/ higher dividend structure you’re more likely to save on your tax return.
- Claim for more expenses: you can offset all of your legitimate business expenses against your income to further reduce your tax liability.
- Limited liability: a limited company’s finances are separate from the personal finances of the owner, meaning you’re not personally responsible or liable for the company’s debts.
However, the implications should also be considered:
- Finding work: as a contractor it can be difficult to find work. You will be solely responsible for finding new clients and contracts in order to maintain a steady flow of income.
- Negotiating terms: you will be responsible for negotiating your contract terms, which may not be something you are familiar with or well-versed in. Additionally, contractor terms differ substantially from permanent employment terms (for example there is no holiday pay or sick pay). If you are a first-time contractor, a specialist recruitment agency can assist you with all these legalities.
- Finance management: contractors are responsible for managing their own finances, including tax, VAT and NI. This can be time-consuming, particularly if running a limited company – which is one of the main reasons the majority of contractors choose to outsource this to an experienced accountant.
- Legislative measures: While the potential financial benefits are certainly attractive, limited company contractors need to make sure they comply with IR35 legislation, a statute which aims to reduce the occurrence of contractors working through intermediaries as a means of avoiding tax and national insurance contributions. If you are found to be contracting for a company in circumstances where you would normally be regarded as a typical company employee for tax and national insurance purposes, you will be penalised and could possibly face further sanction.
What expenses can contractors claim?
It’s likely that if you’ve ever filled out a self-assessment tax return, you’re aware of what an expense is. In a nutshell, an expense is a cost incurred by you or your business that is a requirement of you carrying out your job or your business carrying out its day-to-day operations. Businesses are able to claim certain types of expenses in their tax returns as a means of decreasing the amount of tax payable at the end of the financial year.
A business expense is a charge incurred in the performance of your job or on behalf of the company. As to what you can claim legitimately, there are certain determinations that must be met regarding the type of business you operate and the size and scale of your operation. One of the main benefits of being a contractor and running your own company is in claiming these costs and not having to pay tax on them. In other words, these costs are deducted from your company’s gross profit before tax is applied. It’s in this obvious advantage that the penny often drops for parties eligible to work as contractors under the limited company guise, as there are copious opportunities to reduce tax legitimately.
The type of expenses you can claim as a contractor also depends on whether you fall under IR35. If you don’t, then the situation is much simpler, as HMRC allows contractors to claim for expenses that are wholly incurred for the purposes of your business.
What general business expenses can I claim?
If your contract operates outside of IR35 then here are some of the more typical contractor business expenses that you can claim as a limited company:
The costs associated with setting up your company. If you incurred expenses prior to setting up your company, you can claim these back too, once the company is formed. This is permissible so long as the expenses were wholly incurred as a legitimate business expense. You can do this for up to seven years prior to your first day of trading with the new company.
The costs associated with employing an external accountant providing accounting and bookkeeping services.
This is the employers National Insurance Contribution (NIC) and contributions to a pension plan.
Company operational costs:
The basic costs of operating a business, including outgoings such as business rent, utilities, internet services, insurance, office costs including postage, consumables and equipment.
The costs of wining and dining clients or potential clients, corporate gifts (to a fixed limit of £50), hosting events or taking clients to events. Care should be exercised here, as the expenditure on such items should be considered on the basis of “what is reasonable” (to HMRC). In simple terms, how much are you spending in relation to your company’s income? Always ensure you keep receipts and can justify the expense from a business perspective.
What ‘personal’ expenses can I claim?
Personal expenses are a little different to general business expenses. These are claims made in relation to you doing your job. These include:
Reimbursements from the company for getting to where you need to carry out your duties, such as a client’s site. This includes travel costs, such as reimbursement for fuel and overnight accommodation. It also includes meal allowances. These are meals that you wouldn’t normally have to purchase, such as those while away from home or your normal office. If you travel by public transport, these are permissible but keep your receipts.
Protective wear / uniform:
If you are required to wear specific clothing while on a client’s site and the client requires you to pay for it, this can be claimed back. Examples would include things like overalls and hard hats, protective boots or gloves. But do note that a business suit is not something you can claim for.
Training / Education:
If there’s one constant in life, it’s change. As our businesses change and the skills we require to maintain our competitiveness in business evolve, periodic training may be required. This is an allowed expense provided the training is wholly in support of your job or necessary as part of a contract.
What can I claim for if I am inside IR35
Under the existing IR35 rules, you can claim a fixed 5% for expenses. You don’t need to be able to prove this, although it is always advisable to keep your receipts. This covers the following basic business expenses:
- The costs of using your home as an office
- Administration and secretarial support
- Accountancy and tax advice
- Business development costs
- Printing, postage and stationery
- Training costs
- Computer equipment – if not eligible for capital allowances
- Bank and overdraft interest
- Hire purchase payments
Do note that this is implemented as a flat rate against gross fees. You can’t just take 5% in cash. Also note that when calculating allowances for corporation tax, the ACTUAL expense figure is used, not a flat 5%. This means that the final figure may be more or less than 5%.
In addition to the basic ‘admin costs’ above, the contractor can also claim for expenses such as computer costs, travel, subsistence, training and hiring other people.
Talk to contract accountant experts – Tax Agility
IR35 legislation, running a limited company or just running your own business can be confusing where tax and expenses are concerned. Tax Agility can quickly help you understand what expenses contractors can claim and those they cannot. If you’re working with us, it’s something we can quickly clear up in a short phone call. As contractor accountants, we are here to advise you and reduce the uncertainty associated with all the laws and regulations that apply to those who choose to operate as a contractor.
There are many points to consider before you make the decision to start contracting. If you would like to talk through all the options, we can help you decide on the right structure to suit your individual circumstances.
Please contact us on 020 8108 0090 today for a complimentary no obligation meeting to allow us to maximise your tax savings and take-home pay.
Useful pages for contractors:
- Accountants for contractors
- The benefits of contracting
- Contractor companies explained
- Setting up a limited company
- Limited company management
- Choosing the right contractor accountant
- Setting-up and ongoing accounting packages for contractors
- Tax advice for contractors
- Important dates and deadlines for contractors
- IR35 explained