10 Top Tax Planning Tips for Contractors & Freelancers
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- Aidhan Accountancy
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Here are our 10 TOP Tax Planning Tips for Self-Employed Contractors & Freelancers that could save you in excess of £5,000 of tax.
1. Set up as a Ltd Co.
It sounds immediately obvious but this is the first step any contractor/freelancer should take if they want to maximise their disposable income as far as legally possible. A Ltd Co is a separate trading entity from an individual and is governed by the Companies Act 2006. So, although there is additional responsibility and administrative requirements, the typical contractor/freelancer should be able to save around 20 - 30p in the £ of tax when compared to PAYE, umbrella co or being self employed.
2. Register your Ltd Co. on the flat rate scheme of VAT
This is a potential winner for contractors/freelancers and is easier to administer. In some circumstances it can even save you tax! On the flat rate scheme you pay a fixed amount of VAT based on your turnover (including VAT). The fixed rate depends upon your profession/trade and is pre-determined by HMRC. You can only join this scheme if your turnover is expected to be lower than £150,000 per annum.
See our guide on the flat rate VAT scheme online at: http://www.aidhanfinancial.com/Accountancy/flat_rate_vat_scheme.php
3. Pay yourself a minimal (director) salary
As at 2012/13, this amount is £8,105 which equates to £675 per month. This is the level of an individual’s personal allowance for income tax. The NIC free allowance is £7,605 and is payable at 12% for any salary amount between £7,605 and £34,870 and 2% on any amounts thereafter.
4. Claim your full suite of eligible expenses
There are a suite of expenses contractors/freelancers can claim that they do not realise.
Expenses through your Ltd Co.attracts corporation tax relief at 20% (small business rate). However, there are strict rules on expenses and carelessness or ignorance does not bode well with the tax authorities. We have comprehensively articulated these in our guide about what expenses you can claim which you can access at:
5. Time your dividend extractions correctly
Dividends are a key tool for contractors/freelancers wishing to extract money out of their Ltd Co’s as drawings. Timing your dividend extraction can be a useful tactic in saving tax. In 2012/13 a contractor/freelancer has up to £31,500 (net) dividends (per shareholder) they can extract without incurring additional tax. Any amounts above this will incur an additional dividend tax of 32.5% (effective rate is 25% after the notional tax credit of 10%) and 42.5% for any amounts above £150,000.
6. Claim the AIA on capital assets
If you buy a capital asset (items such as laptops, hardware, fixture and furniture for your office), you can claim what is known as a first year capital allowance. The first year capital allowance is like an accelerated depreciation charge that provides tax relief in the year of purchase. In 2012/13, the first year allowance is £25,000 although there are transitional rules in place.
7. Ensure you comply with IR35 rules
IR35 is a piece of tax legislation that assesses contractors/freelancers based on the substance of their working arrangements. Being caught inside of IR35 can defeat the object of running your contractor/freelancer business through a Ltd Co. IR35 is assessed on a contract by contract basis.
See our guide for more information on IR35 at: http://www.aidhanfinancial.com/Accountancy/what_is_ir35.php
8. Submit your data and files on time
If you are using an accounting service or doing your own books and returns always submit your data and returns on time. If you continuously submit your data or returns late you will get hit with unnecessary fines from both HMRC and Companies House. As with anything, the GIGO principle applies – Garbage In, Garbage Out. If you provide your accountant, the tax office or Companies House with incomplete, incorrect or no data then you will only get back what you put in. We are all only as good as the data/information we receive.
9. Financial products
• Pension contributions
• Relevant life policy (life assurance)
• Investment products
Why not get your Ltd Co to pay your pension contributions or life assurance premiums?
This attracts corporation tax relief instantly and is a great way to get the taxman to make a contribution to both. A director can set up an executive pension scheme and get the company to make (reasonable) contributions to get their life assurance paid through the company by way of a relevant life policy.
10. Entrepreneur’s relief
This is available to contractors/freelancers who are selling/closing down their Ltd Co’s. Once all other tax-efficient means have been utilised (director salary & dividends), entrepreneurs relief can be applied to any remaining funds in the company taxed at only 10%. However, this is subject to a whole host of criteria being satisfied.
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This publication is intended for general guidance and does not replace the need for professional advice. We take no responsibility for any consequences of actions taken as a result of this guide.