As a contractor, managing your tax liabilities is your own responsibility. Unlike employees who are automatically enrolled into the PAYE scheme – where employers deduct tax liabilities prior to payment – contractors must calculate their own National Insurance contributions and Income Tax.

There are a few things that contractors can do to minimise their tax liabilities, leaving them with more to take home.

In this article, the Burton Beavan team takes you through four different ways to improve your tax efficiency as a contractor.

Claim for your business expenses

When you claim for your business expenses, they are deducted from the profit of your company on paper. The lower your profits are, the less you will pay in Corporation Tax.

There are many things that are tax deductible, here is a list of a few you may not have considered:

• If travelling by car to reach your client, you can claim for the mileage you have covered,
• If you travel by train, you can claim this against your profits,
• Congestion fees and taxi services are deductible also,
• All of the meals and refreshments you purchase while working for a client can be claimed back too, it’s just a case of keeping your receipts and filing them away,
• The costs involved with staying at a hotel or in a bed and breakfast are tax deductible, so long as they aren’t excessive.
• You can even claim for eye tests at an optician’s if your work involves spending large amounts of time at a computer.

Payroll and Dividends

The way you take home your pay can affect how much you spend in taxes. By reworking your payroll system, you can save on Income tax and National Insurance payments.

You can earn up to £11,500 and not pay any Income Tax, thanks to the Personal Allowance.

You can then withdraw money from your company through Dividend Payments. Dividend payments are subject to Corporation Tax, which is set at 19%. As a result, you may find yourself able to decrease your tax liabilities – Corporation Tax rates are lower than Income Tax rates.

Here’s how you do it:

• Take a salary of £8,164 (£680.33 per month)
• Use remainder £3,336 of personal allowance to take dividends
• Use dividend tax allowance (£5,000) to take further dividends
• This will give you a tax-free earning of £16,500.

£8,164 is the threshold at which you start to pay National Insurance Contributions. Keeping your salary under that threshold means you’re exempt from paying it altogether.

How you can use VAT

Contractors of every description use VAT as another way to minimise the money that HMRC takes from them.

You can claim back all VAT on products that you have bought for your business, in the same way that you would claim back business expenses.  However, this can only be done if the company which sold you the goods is VAT registered.

How you can use VAT – Change VAT schemes.

There is a good reason for changing your VAT system. In April 2017, the Flat Rate VAT Scheme increased flat rate VAT from 14.5% to 16.5% – this is the percentage of VAT payable on all qualifying goods and services.

As a result of the change, we would advise that you review which VAT system you use with an accountant to see if it is the most suitable for your business. We have helped many contractors switch to a more profitable scheme, enabling them to save more each time they file their taxes.

The IR35 Regulations

These regulations are in place to stop contractors from working around current tax laws.

Specifically, they stop “Disguised Employees” who work for an employer through a privately-owned intermediary. By doing this they aren’t subject to the same levels of Income Tax and National Insurance Contributions as an employee on a payroll would be.

Unfortunately, these regulations are quite vague, which means that many honest contractors have been forced to pay unfair amounts in both taxes and penalties. To avoid this issue, you should have your accountant review your working contracts to make sure you are on the right side of the regulations.

Working with us, here at (FIRM)

Whether you are worried about IR35 regulations, or you would simply like some advice about claiming for business expenses and VAT, we can help.

To reach our expert team of advisers, call 01606 333 900 or email hello@burtonbeavan.co.uk.