The Top 9 UK Tax Planning Tips for Contractors
As a contractor, managing your tax affairs can be complex, time-consuming, and expensive. However, effective tax planning can help you save money and stay on the right side of HM Revenue & Customs (HMRC). In this blog, we’ll provide you with the top tax planning tips for contractors in the UK.
1. Understand Your Tax Obligations
It’s important to understand your tax obligations as a contractor. This includes knowing the tax rates that apply to you and the deadlines for submitting tax returns and paying tax. You can find this information on the HMRC website or by consulting with a tax advisor.
Register for Self-Assessment
As a contractor, you’re considered self-employed for tax purposes. Therefore, you need to register for self-assessment with HMRC. This means you’ll need to file a tax return every year, even if you have no tax to pay.
Keep Accurate Records
It’s essential to keep accurate records of your income and expenses, including any receipts or invoices. This will help you complete your tax return correctly and avoid penalties for inaccurate or late filings.
2. Claim All Allowable Expenses
As a contractor, you can claim certain expenses against your income to reduce your tax bill. However, the expenses must be directly related to your work, and you must have receipts or invoices to support your claims.
You can claim travel expenses for business journeys, including public transport, parking fees, and mileage. However, you can’t claim for travel between your home and your usual place of work.
Equipment and Office Expenses
You can claim for equipment and office expenses, such as laptops, printers, and stationery. You can also claim for rent, utilities, and other costs associated with running a home office.
3. Make Use of Tax Reliefs
There are various tax reliefs available to contractors that can help reduce their tax bills.
Annual Investment Allowance
You can claim the annual investment allowance (AIA) on purchases of plant and machinery, up to a certain limit. This means you can deduct the cost of these purchases from your profits, reducing your tax bill.
Capital allowances allow you to deduct the cost of assets from your profits, reducing your tax bill. This includes assets such as vehicles, machinery, and equipment.
4. Consider Using a Limited Company
Many contractors operate through a limited company, which can offer several tax benefits.
Lower Tax Rates
Limited companies pay corporation tax on their profits, which is currently 19%. This is lower than the income tax rates paid by self-employed contractors.
Tax-efficient Extraction of Profits
As a director of a limited company, you can take a combination of salary and dividends to minimise your tax liability.
5. Seek Professional Advice
Effective tax planning requires specialist knowledge and expertise. Therefore, it’s essential to seek professional advice from a qualified accountant or tax advisor.
Choosing the Right Structure
An accountant or tax advisor can help you choose the most tax-efficient structure for your business, whether it’s a sole trader, limited company, or partnership.
Maximising Tax Relief
They can also help you identify all the tax reliefs and allowances you’re entitled to, ensuring you’re not paying more tax than necessary.
6. Make Pension Contributions
Contributing to a pension scheme is a tax-efficient way to save for retirement. As a contractor, you can make pension contributions and receive tax relief on the amount you contribute, up to certain limits.
Personal Pension Contributions
You can make personal pension contributions and claim tax relief on the amount you contribute. The maximum amount you can contribute each year and still receive tax relief is the lower of your annual earnings or £40,000.
Employer Pension Contributions
If you operate through a limited company, you can make employer pension contributions on behalf of your employees, including yourself. These contributions are tax-deductible for your company and don’t count towards your annual allowance.
7. Utilise the Trading Allowance
The trading allowance is a tax relief that allows you to earn up to £1,000 of income from self-employment or casual work without paying tax.
Who Can Use the Trading Allowance?
The trading allowance is available to individuals who earn income from self-employment or casual work, and whose total income from all sources is less than £1,000.
How to Use the Trading Allowance?
To use the trading allowance, you simply need to report the income on your tax return and claim the trading allowance as a deduction. You don’t need to register as self-employed or pay any tax on the first £1,000 of income.
8. Timing of Income and Expenses
Timing your income and expenses can have a significant impact on your tax bill. By deferring income and accelerating expenses, you can reduce your taxable profits and lower your tax bill.
If you have the option to defer income until the next tax year, you can delay paying tax on that income until the following year.
Similarly, if you have the option to accelerate expenses into the current tax year, you can reduce your taxable profits and lower your tax bill.
9. Consider Incorporation Relief
Incorporation relief is a tax relief that allows you to transfer your business to a limited company without incurring a capital gains tax liability.
Eligibility for Incorporation Relief
To be eligible for incorporation relief, you must transfer your business to a limited company in exchange for shares, and you must own at least 5% of the shares in the company.
Benefits of Incorporation Relief
Incorporation relief can help you reduce your tax bill when transferring your business to a limited company. It can also provide greater flexibility and protection for your personal assets.
Should I Hire A Contractor Accountant?
Our specialist team of expert and highly qualified contractor accountants are here to deliver everything you need to set up, operate and grow your business. Operating your own contracting business is highly rewarding, but it can also be financially beneficial to undertake.
However, amongst managing projects, staffing, organising premises and developing your service offering you will also have to deal with the daunting and difficult task of managing your company’s finances. Make running your business easier with MJ Kane & Co Accountants.
Learn more about our Contractor Accountants Service
By utilising these tax planning tips, contractors in the UK can optimise their tax position, reduce their tax bill, and stay compliant with HMRC. However, it’s important to seek professional advice to ensure you’re taking advantage of all the available tax reliefs and allowances.
Contractor Accounts FAQs
How can I find a qualified accountant or tax advisor?
You can search for a qualified accountant or tax advisor on the websites of professional bodies such as the Institute of Chartered Accountants in England and Wales (ICAEW) or the Association of Chartered Certified Accountants (ACCA).
Can I claim for home office expenses if I’m a sole trader?
Yes, you can claim for home office expenses if you’re a sole trader, as long as the expenses are directly related to your work and you have receipts or invoices to support your claims.
How can I reduce my VAT bill as a contractor?
You can reduce your VAT bill by registering for the Flat Rate Scheme, which allows you to pay a lower rate of VAT on your turnover, depending on your industry sector.