Introduction
Here’s our top tax tips for contractors (UK) guide for 2023/24 which will help you reduce your tax bill. We include tips for UK contractors as well as UK small business tax tips. If you’re looking for contractor tax help and advice, we include lots of independent contractor (UK) tax tips. What’s more, there’s many tax tips for small business owners in general. We’ll demonstrate lots of tax-saving tips and how to save tax as a contractor. We’ll also explain good small business tax advice (UK) along the way. If you’re IT contracting (UK) or contracting in another industry, these UK tax saving & planning ideas will help increase your take-home pay when you implement many of them. We’ll include tax tips for individuals who run their own business and some tax optimisation (UK) ideas.
These contractor tax saving (UK) tips and tax advice for independent contractors mainly apply to those working through a limited company. When your UK tax structure setup is of a limited company, there’s many contractor tax benefits and tax reduction tips you can utilise. These tax benefits of being an independent contractor enable you to claim for some costs which aren’t available when self-employed. In turn, it results in Corporation Tax savings. In addition, you can pay yourself tax-efficiently to minimise your overall taxes as a contractor. Therefore, we’ll research how to save tax as a limited company and tax planning for business owners. Importantly, when you use these ideas in respect of tax planning for contractors, you’ll pay less tax as a contractor.
Initial thoughts
First thoughts on save tax in UK
Our tax tips for small businesses guide shows you how to save tax as an independent contractor company. We set out some good ideas in respect of tax planning for small business owners and contracting individuals. If your work is in IT (or any other industry), it’ll help reduce your IT contractor tax liabilities. Along the way, you’ll make small business tax savings. However, many of the contractor business tips and advice apply to other business owners as well. As a result, it’ll help them make savings on small business tax (UK) too.
Furthermore, this guide is very useful for new business owner tax tips (UK). This includes when you first start out as a limited company contractor. Our small business tax saving tips guide explains the best way to pay independent contractors. It also shows how to reduce your small business tax rate (UK). We’ll explain what you can include in your tax write offs (independent contractor). Overall, we’ll show how to make savings in many other areas when you’re contracting. Here’s a list of tax planning tips for contractors from another website and, as you’ll see, our guide goes into a lot more detail.
UK contracting versus employment
When you’re employed full-time or work through an umbrella company, your employment status is a PAYE employee. Let’s now consider do contractors get taxed more than someone who’s employed or working through an umbrella arrangement. Under this scenario, your employer takes care of the administration and financial side. In addition, a person under PAYE will pay tax and NI on their salary. When considering do contractors pay less tax, the answer is yes due to utilising a mix of salary and dividends.
When you’re a business owner, you’re in control of the administration and finances for your company. Therefore, when you’re working as a contractor, UK tax planning (UK) tips and advice can help you a great deal. As a contractor, you’ve the opportunity to do some small business tax planning. There are also various tax benefits of being a contractor not available when you’re employed.
In our UK tax tips for independent contractors, we’ll investigate various areas of contractor tax planning. Key to note, we’ll consider how to pay less tax as a limited company and how to save tax as a contractor.
How do you make savings & maximise your income?
As an individual, you can make personal savings, wherever they’re available in terms of your household bills. What’s more, you can consider how to make your own personal savings generate extra income. This could come by way of maximising any interest on dividend income by looking into savings and investment ideas. For example, you can open a personal savings account, Cash ISA or a Stocks and Shares ISA.
Likewise, when considering how to reduce taxes as an independent contractor, you can make savings in your day-to-day operations. Some handy UK tax tips and advice help you achieve this. When considering how to pay less taxes as an independent contractor, you should ensure you claim your legitimate business expenses. Furthermore, you can investigate and learn about other available small business tips (UK). Basically, good tips for tax planning and operating efficiently help reduce UK tax for small business. Our tax tips for contractors’ and how to save tax (UK) guide shows you how to make savings. Indeed, we’ll demonstrate the ways to reduce tax when running your own UK company.
Much of our limited company contractor tax advice and tax planning for small business applies to small company directors. Many of our tax tips for small business owners apply to sole traders and partnerships too. We’ll demonstrate ways to reduce tax (UK) for your business. Furthermore, we’ll show how to save tax and operate tax efficiently with our UK tax tips for small business owners. Besides making personal savings as an individual, you can make business savings too. Please read on to learn our contractor tax planning tips and how to operate tax efficiently.
Run your own company & UK tax tips for business owners
When you run a UK independent contractor company or small UK business, work can be a challenge each day. This can add to the stress when you’re already running a busy life outside work.
This guide can be handy, and the contracting advice below shows how you can work and operate efficiently. As a result, you’ll make savings if you take on board many of the tax savings tips for small business. Therefore, when you run your own company, if you utilise many of the UK independent contractor tax tips and ideas below, they’ll stand you in good stead and help reduce your tax exposure.
Further initial thoughts on saving tax in UK
UK contracting industries
You may run your own UK IT contractor company or be a small business contractor in a different industry. Indeed, there’s all sorts of small business contractors who work many different contracting industries and these include:
- IT contracting.
- Management contracting.
- Mechanical contracting.
- Engineering contracting.
- And many more.
Our tax tips for contractors are suitable for all UK contractors and small business owners with their own companies. Indeed, it covers IT contracting tips as well as tips for all other UK contractors and small businesses.
Besides our tips for tax saving for your UK contractor limited company, we have afirst-timer’s guide to contracting in the UK. This guide on contractor small business tips and advice gives a complete overview of what to consider when you begin to run your own contractor limited company and start out for the first time. Besides planning ahead, there’s many other things to consider when starting your business. This includes business banking and choosing an accountant or contractor tax advisor. It includes deciding on your accounting system, keeping accurate records and many other considerations. The first part of this contractor tax tips guide will include advice which coverssalary, dividends, and tax allowances.
Individual tax tip
One of our tax saving tips for individuals is to consider if you can claim for the UK marriage allowance. Although this isn’t beneficial to everyone, you could check to see if you can claim the UK marriage allowance. This is available to those with a spouse, including civil partners.
It’s beneficial to claim for this when one partner has an income within the basic rate tax band (income up to £50,270 pa), whilst the other partner isn’t using up all their personal tax allowance (this is currently £12,570 pa).
UK tax tips for contractors
1 Reduce tax by when you pay a tax-efficient mix of dividends & salary
An important piece of small company tax advice for contractors and part of the financial planning for independent contractors is when you’re a director of your own company you can choose what salary to pay yourself.Basically, when we consider how to save on taxes as an independent contractor, it’s one of the best tax saving tips (UK) as a UK contractor because when you work through an umbrella company or are employed you don’t have a choice. Basically, when you don’t have your own company and you earn under £50,270 in 2023/24, you’ll be a basic rate taxpayer. If you earn above £50,270, you’ll be a higher or additional rate taxpayer. Therefore, to summarise, in 2023/24:
- Above £50,270 but less than £125,140-you’ll be a higher rate taxpayer.
- Above £125,140 -you’ll be an additional rate taxpayer.
In the tax year 2023/24, every individual has a tax-free personal allowance of £12,570. In addition, you have adividend allowanceof £1,000 (£500 in 2024/25).
Suggestion
When we consider a UK contractor and taxes, a gross salary of £1,047.50 per month equates to£12,570 per annum. This is the same as your personal allowance therefore on a salary of this level there’ll be no contractor income tax on your salary. That’s unless you’ve other income such as rental profits or significant bank interest, etc. Basically, £1,048 is where the NI Primary Threshold now falls following the government’s lining up of the personal allowance and NI threshold.
An optimal salary and one of our income tax planning tips in 2023/24 is to take a salary of £1,047.50 per month. Indeed, when you take this level of salary, your company saves UK contractor tax by way of a Corporation Tax (CT) saving of 19% or 25% on the salary cost. This level of salary is optimal as part of a salary and dividends strategy for contractors if you’ve no other income using up your personal allowance. Such additional income could include rental profits, self-employment profits, pension income etc.
What to do when you’ve other taxable income?
If you have other income, a lower amount of salary such as £758 per month (which is the Secondary Threshold -this is the amount where the employer starts to pay NI) is the optimal salary. In fact, you could even pay yourself the Lower Earnings Limit (LEL) which is £533 per month. Basically, to ensure your NI contributions count as a `qualifying year’ for state pension purposes, you should pay yourself a salary of at least £533 per month for the full twelve months of the tax year.
If your company isn’t currently trading and therefore not paying Corporation Tax, you can consider a lower monthly salary, such as the £758 or £533 suggested above.
Individuals should aim to attain 35 `qualifying years’ during their working life. When they do this, they qualify for the full UK state pension when they retire.
In 2023/24, dividends which fall within yourbasic tax rateare taxable at 8.75%.
Tax efficiency thoughts
As a limited company contractor, to be tax-efficient, you may decide to take a gross salary of either:
- £12,570 per annum (£1,047.50 per month); or
- £9,096 per annum (£758 per month).
You can then take the rest of your income as dividends and as a result, this’ll reduce your contractor taxation in the UK.
If you’re earning enough to take a gross income of £50,270 from your company, and your only income is salary and dividends, the contractor tax (UK) which is payable under the above example via your Self-Assessment Tax Return is £3,211.
If you have other personal income. you must look at your overall picture. Basically, you can do this by taking all your other income into account before deciding what company income to take. Indeed, you should discuss this with youraccountantor contractor tax advisory who look after your independent contractor tax requirements. As a result, you can decide on the most tax-efficient mix of salary and dividends.
2 Tax tips for contractors -minimise National Insurance (NI) contributions
When we investigate how to save taxes as an independent contractor, salaries incurNational Insurance. What’s more, the higher your salary is, the more NI you and your company will pay. Indeed, some good UK contractor tax advice (small business) is if you decide to pay yourself on a tax-efficient basis and take a salary as in the example in the above point, you’ll minimise the NI you incur. This can be the best way to pay contractors and as a result, you can take the rest of your income as dividends.
3 Tax tips for small business owners -be aware of how tax bands& allowances work
This is one of the important tax tips for contractors to consider; therefore, please take note. One of the key income tax saving tips is you don’t have to take all the dividends available in the year your company generates the profits. The profit in a company is taxable in the year the business makes it. Any post-tax income you don’t pay as dividends is carried forward to the following year. It’s then available to be paid in the future.
Another important point in these contractor tips is company income isn’t taxed twice. It’s only taxable in the year the business earns it. Therefore, you may incur higher tax rates if you draw out all the dividends available. The rates payable if you do are:
- 75% on gross income up to £50,270;
- 75% on gross income above £50,270; and
- 35% on gross income above £125,140 (£150,000 in 2022/23).
4 Tax tips for contractors -don’t overdraw dividends
When you run your own company, the business, like you, has tax bills. UK companies payCorporation Tax(CT). Your business has other taxes too, which are:
- VAT if your business isVAT registered.
- PAYE and National Insurance contributions if you run a PAYE scheme.
A UK contractor should ensure they draw out dividends after allowing for the company contractor’s tax bills.If you draw out more than is allowed, the surplus drawings over profit areillegal dividends. Consequently, your dividends must then be restricted. In turn, this’d create an overdrawn director’s loan account. This loan can then result in extra tax to pay. The additional tax will depend on how high the borrowing is and how long it’s left owing.
5 Small business tax advice (UK) -VAT
VAT sub-scheme
Another important piece of tax advice for business owners is to decide which VAT scheme you’ll use. When we look at how to save money on taxes as an independent contractor, nowadays most UK contractors can save tax by operating under the standard VAT scheme. This is also known as the standard scheme.
Recently, theVAT Flat Rate Scheme(FRS) was more tax advantageous. However, the government changed the rules in April 2017. Under FRS, most contractors now pay over 16.5% Flat Rate VAT on their gross income. This result equals an actual VAT rate of 19.8% on the consultancy fees you charge. This % is comparable to the usual 20% VAT they charge -an actual saving of £20 per £10,000 invoiced.
If you operate under the standard VAT scheme, you can reclaim the VAT within your expenses on your VAT returns. For most contractors, this shouldn’t be a complicated job. However, it involves a little more work when you operate under the standard VAT scheme. As a result, you’ll reduce tax or be better off operating under this scheme.
Should you use cash or invoice basis for VAT?
A business can report its VAT on a cash basis or invoice basis. However, the invoice basis of VAT reporting only applies if you’re a large business. As a result, most contractors can use the cash basis method.
Operating on a cash basis means paying over the VAT you invoice to your customers once it’s received. What’s more, you can only reclaim VAT on the invoices from suppliers when you’ve paid them.
Therefore, reporting your VAT on a cash basis helps improve your company’s cash flow.
Making Tax Digital
Another consideration is businesses who register for VAT must now comply with MTD. This stands for Making Tax Digital.
6 Contractor tax tips -claim all genuine business expenses
Another one of our important tax savings tips for small business is to ensure you receive tax relief on allgenuine business expenses. Therefore, we now look at another one of the best tax tips for consultants and UK contractors and small business owners. This key tax advice for small businesses and UK contractors ensures you claim for all thebusiness expensesyou’re legally allowed to. This’ll help reduce the tax for contractors (UK) by minimising how much Corporation Tax their company pays. Indeed, this is one of the best ways which demonstrates how to save tax as a contractor. The business will pay its Corporation Tax bill after it completes and files its future company tax returns.
Please ensure you obtain a receipt for any business expenses you incur. Your company can then repay these expenses to you. Indeed, some UK contractors and business owners don’t do this; therefore, it’s key you do. Otherwise, you’re paying for these out of your own post-tax income.
Which expenses have specific rules?
Another small business tax tip is besides the usual business trading expenses, where you meet specific criteria, you can claim for some other costs as part of your UK independent contractor business expenses. In turn, these’ll help reduce tax for small businesses (UK):
- Home office.
- Professional subscriptions.
- Company donations.
Another way to help reduce tax for small business (UK) and again after meeting specific criteria, you may be able to claim for:
- Business clothing.
- Business gifts.
When you claim for the above, it’ll help reduce your contracting tax. As with all business expenses, you should collect and save receipts. This can be either a paper receipt or an electronic one (or a mix of these methods). The receipts are proof you’ve incurred the expenses.
You may be planning on making capital expenditure purchases for your business in the near future. Therefore, a tip in respect of year-end tax planning for small business owners is to purchase the assets before your company or business year-end. When you do this, the company will receive the tax relief on the current year’s tax bill, rather than on the tax bill for the following year.
7 Company caror private car when you’re contracting?
Another one of our important tips for independent contractors is to consider how you get around to your work locations. In most cases, its more tax-efficient to keep your car as a private vehicle and use this for business journeys. When you do this, you can reduce your contractor taxes by claiming mileage at HMRC’s allowed rates.
If you run a car through your company, most vehicles cost a fair amount in tax. UK car tax is based upon thebenefits in kind which apply to a company car. These are usually more than the CT your company will save on car costs and running costs.
However, nowadays, if you run ahybrid or electricvehicle, you may be better off with acompany car. Currently, there’s some good tax breaks for electric and hybrid vehicles. Therefore, one of these vehicles is worth considering if you plan to run a company car through your business.
8 Tax tips for contractors -pay your spouse a salary
Another one of the business tax saving tips to help reduce your independent contractor taxes (UK) is to consider paying your spouse a salary. Indeed, your company can pay your partner a wage if they’re doing some work for your company.This is one of our UK independent contractor tips to consider, especially if your spouse may do administration-type tasks. Such tasks could include dealing with e-mails and answering phone calls. It could also inlcude opening the post, updating your accounting system, etc.
When your companypays a salary to your spouseor partner, their wage will reduce the amount of company profit that’s subject to CT.
Before considering the above, you ought to consider their other income. This is because a salary from your company could affect their overall tax bill.
As part of your personal tax return preparation, and on an ongoing basis where appropriate, you could consider making use of the transfer of themarriage allowance.This is only beneficial in certain scenarios as mentioned earlier; however, you’ll benefit from this if you qualify.
9 Tax tips for small business owners -stay informed of your company’s ongoingfinancial position
Here is some further good small business tax advice and an essential tax tip for UK contractors and small business owners. Once you’ve taken your salary and dividends, reimbursed expenses and paid any other bills, you’ll have a balance left in your company bank account(s).
The balance of your company bank account should cover company taxes and any other bills. After considering all this, you should be able to determine how much of the balance is still available for you. Most online accounting software systems, including FreeAgent, will provide this information on their online portal.
10 Make sure you don’t fall foul ofthe 24-month rule for travel expenses& what is this?
Another one of our key limited company contractor tax tips is you can claim your travel expenses to and from work and between other work sites. Indeed, this’ll help reduce the tax for contractors. However, another one of our contractor’s tips is you must be aware of the24-month rule for contractors. This is one of the tax rules for contractors and it states as soon as you know you’ll be at a worksite (that you spend 40% of your working time or more) for longer than 24 months, you can no longer claim expenses for that site.
Being able to claim your travel expenses can have a significant effect on your net income. The higher the cost of your travel expenses, the more influential the impact is if this affects you.
11 Small business tax advice (UK) -save tax when you hold your`annual event’
Another way to save taxes for contractors is every year, you can claim up to £150 per employee for an`annual event’ or `events’. Basically, this event could be the annual Christmas party or a series of events during the year. Indeed, the party is fully tax-deductible and one of your tax write offs for independent contractors, providing the amount doesn’t exceed £150 per employee.
12 Tax tips for contractors -reduce tax when you claim trivial benefits
This is one of the less well-known UK tax saving tips for small business owners and contractors, however it helps to reduce contractor limited company tax. Your company can pay you and any of your employees`trivial benefits’ every year. Indeed, this is another one the tax benefits of independent contractor status. What’s more, individual amounts paid for trivial benefits mustn’t exceed £50, including VAT.
There is a total cap of £300 per annum for directors if the employer is a `close company’ (companies with less than five shareholders). Therefore, this includes an individual who’s a director, another office holder, or a member (shareholder), including their family or household.
13 Tax savings tips for small business -save tax when you claim yourmobile phone coststhrough your business
Another one of the tax deductions for contractors in the UK are phone charges. Indeed, if you use yourmobile phonefor work reasons and there’s only a `token’ element of personal usage, you can claim your mobile phone costs as a business expense.In addition, when you claim mobile phone costs, you should ensure the bills and account are in your company’s name.
14 Tax tips for contractors -claim for use of your home as an office
A top piece of small business tax advice for independent contractors is the government increased the amount you can claim for working from home to £6 per week on 6 April 2020. Basically, this is another tax write off for independent contractors and you can claim for this, and perhaps more if you do a lot of work from home.
If you have an office separate from your home address, you can claim for the rent, business rates, utility costs and any service charges.
15 Tax tips for small business owners -consider company pension scheme
If you make contributions via your business into a company pension scheme, this is a tax-deductible expense. You must set this up as an employer pensions contribution because employee or personal contributions are treated differently in a tax context. As a result, it’ll save your company CT. This is another one of the key tax benefits for independent contractors. When you make pension contributions through your company, it’s a way of extracting further funds without incurring higher tax rates.
16 Small business tax tips -invest in a good accountant
Investing in a good accountant specialising in the contracting industry is a good idea. We detail the things to consider if you want to change your accountant.Besides, contractor tax advice, a good accountant can advise on other areas such as when to pay Capital Gains Tax and potential Inheritance Tax issues.
17 Tax tips for contractors -make tax savings with certain financial products
When you’re a contractor, you’ll lose certain benefits you receive as an employee. These may include income protection, health insurance, sick pay etc. A good way to protect yourself is to get your contractor finances in order. When you purchase any financial products, the provider should be regulated by the Financial Conduct Authority.
Your contract will state which insurances you require for your work. This is likely to include Professional Indemnity insurance, but it could include other contractor insurances too. Through our website you’ll receive a contractor discount when you get contractor business insurance in place.
Relevant Life Insurance(RLI) is different from standard life insurance. If you take RLI out, it’s tax-deductible through your company. This works out much less expensive when you pay for it through your company over the policy term.This is another example of how to save tax as a contractor.
As a contractor, if you can’t work due to illness, you’ll no longer be able to claim statutory sick pay. Therefore, if you fall ill,Income Protectionwill provide you with added peace of mind.
A valued partner of Contractor Advice UK is Broadbench. They are experts in contractor finances and offer both the above products. To date they’ve helped many of this contractor website’s members and visitors. All our guides on financial type policies can be found on the finances page.
Final thoughts
The ideas within our tax tips for contractors demonstrate how to save tax as a contractor or UK small business. However, when we consider how to reduce tax as a contractor, within these tax tips (small business) and tax advice for independent contractors we don’t cover absolutely everything. On the other hand, we do include many tax saving ideas for UK limited company contractors. Finally, many of our tips above help to reduce your overall tax burden as a UK contractor or UK small business. However, you should look at your overall tax position with your accountant.
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