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How to pay less tax as a contractor

The Wirral takes enterprise very seriously, as this region of the North West is home to centres for helping start-ups to grow, like the Whitfield Business Hub in Heswall, as well as its own Chamber of Commerce located in Birkenhead. The area also has plenty of people who work as skilled freelance contractors, whether it is in IT or another sector, and they need to know how to keep their tax bill to a minimum.

Nobody wants to pay more tax than they have to, but the system for contractors is unique. This guide will look at how you can cut the tax you pay as a freelance contract worker without signing up to any questionable tax avoidance schemes that could end up coming back to bite you further down the road.

Learn what expenses you are entitled to claim for

Business expenses can be a very useful way of reducing your annual tax bill, as any expense racked up while you are doing the job that you have been contracted to do can be claimed back against your tax bill for the year. How it works is that the expense that you are claiming for is subtracted from the profits you make for that year and, because corporation tax is calculated based on your annual profits, you will pay less of it the higher your expenses.

Of course, it is important to know what actually qualifies as a legitimate business expense before you look to take advantage of it. It has to be money that you paid out solely to enable you to carry out your work, with one example being travel costs for journeys you had to make and another being a piece of equipment that you needed to buy such as computer software.

Set up a pension for yourself

Even aside from the potential tax reducing benefits of setting up a pension pot, this is something you really should be doing, as a freelance contractor does not have an employer to take care of this on their behalf and it can be very easy to fall into the trap of thinking that retirement is too far in the future to worry about.

In the more immediate term, paying into a pension pot makes good sense from a tax perspective, because any money from your profits that you set aside towards your pension will be excluded from your company’s taxable income. This means that you will not have to pay any tax on it.

Make sure that you file your return on time

One of the more common ways in which contractors end up paying more than they should have to is through the failure to complete tax returns accurately and file them before the deadline. A downside of operating as a freelance contractor is that it makes you liable for dealing with all of the tax responsibilities such as accounts, VAT returns and payrolls yourself and HMRC takes a hard line with those who file late or wrong information.

There are two issues that you need to be aware of: keeping accurate records so that your tax returns are correct, and making sure that you set aside enough money to pay the tax that you owe. This can be a time consuming and stressful addition to the pressures of running your day-to-day business operations, which is why some pay professional contractor accountants in Birkenhead and other parts of the country to deal with it. Filing late or inaccurate information can lead to fines, which increase the longer it goes on, so an accountant is often more cost-effective in the end.

Operate via a limited company

Contracting out your services via a limited company can help you to reduce your tax burden by allowing you to divide incomings into salary and dividend payments. This offers you potential tax relief that is not available if you opt for standard self-employment. Of course, if you choose to set up a limited company for yourself, you will need to make sure that you do not fall foul of IR35. This is the tax law designed to stop contractors using ‘disguised employment’ as a form of tax avoidance – defined as setting up a limited company as an intermediary between yourself and your client rather than receiving payments directly as an employee.

Getting caught up in the IR35 legislation can be costly, so if you are using a limited company it will be best to only accept contracts that fall outside of it. This is where being close to the Wirral Chamber of Commerce will be useful for contractors in towns like Birkenhead or Bromborough, as the staff there will be able to offer advice to make sure you do not fall victim to it. Alternatively, an accountant will also be able to do this.

Be aware of tax initiatives and schemes

The government often launches new tax initiatives for working people of all types and it makes sense to pay attention to any that are aimed at contractors. Not every one of these will be applicable to you or will help you reduce your tax bill, but some of them will and there is no sense in losing out on potential savings just because keeping abreast of them seems like too much work.

One example of such an initiative is the Flat Rate VAT Scheme, which was designed to make the VAT system easier for small businesses to navigate. Those using this scheme charge VAT at a standard 20% rate, but pay a lower amount back to HMRC than those on the Standard VAT Scheme. The amount paid back depends on what business sector you are in, but it is worth investigating.

These are all ways that you can cut the amount of tax you will have to pay as a contractor. For a great choice on self-assessment accountant in Birkenhead or Bromborough, look no further than Wainwrights. Our advice will be invaluable in picking the best tax options for you.

Posted by Louise
August 1, 2019

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