Tax planning for contractors

A qualified accountant should be the first person to provide detailed advice on effective contractor tax planning. The current structure of the tax system for limited company directors offers plenty of scope for saving tax for contractors and their families.

So how do contractors pay less tax? A typical independent contractor tax plan will contain a mixture of some of the following aspects:

  • Salary and dividend split
  • IR35 compliance
  • Appointing family members as shareholders
  • Claiming back allowable expenses from previous tax years
  • Pension contributions
  • Capital expenditure allowance allocation
  • Tax-free savings accounts
  • Special investment schemes
  • Single premium investment bonds
  • Members’ Voluntary Liquidation

Salary and dividends – tax planning at its most basic

Tax planning for limited company freelancers and contractors nearly always includes a recommendation to be paid with a mixture of salary and dividends. Significant personal tax savings can be made using an efficient split of salary (money paid to a director via the PAYE system) and dividends (distributions of after-corporation tax profits made by a company to its shareholders).

For example, at time of writing, receiving a salary of £46,350 via PAYE results in income tax and National Insurance payments of £11,441.12. An optimal salary/dividend split would result in a combined personal and corporate tax liability of £9,105, a saving of £2,336.12.

IR35 will affect any tax planning

Given the savings on tax that can be achieved by staying outside the scope of IR35, a contractor should make sure that the only contract work they or their limited company takes on falls outside the scope of IR35. If you’re contract is within IR35, most tax planning will be impossible to utilise, for example under IR35 you lose the ability to use the dividend mechanism altogether.

Appoint family members as shareholding directors

Further savings can be made by appointing family members, particularly spouses and civil partners, as directors of a contractor limited company. This way, both individuals can take advantage of their personal tax and dividend allowances during the year.

For example it’s actually more economical for a husband & wife team to split a £90,000 remuneration package equally between them, than for one director shareholder to take the £90,000 on their own, hitting higher tax thresholds.

This arrangement was established in the Arctic Systems ruling in 2007.

Claim back allowable expenses from previous years

Often, contractor limited company directors will switch from a mainstream accountant to a contractor specialist. Doing so often gives rise to expenses a mainstream accountant has not claimed for.

Upon changing accountants, there may be a significant gain for a contractor limited company director by asking their new accountant to examine previous years’ personal and corporate tax returns for omissions. This may result in a tax rebate.

Utilise pension contributions

Pension contributions nearly always form part of an accountant’s recommendations for independent contractor tax planning.

A contractor should always be comfortable with the level of investment they make into their pension. Many contractors will use pension contributions to move themselves from a higher to a basic rate tax band. An accountant’s advice should be sought on this.

Company contributions to pensions schemes are an allowable expense for corporation tax purposes. If a contractor limited company makes payments to a director’s pension, there are no personal tax implications for that director, meaning it’s usually financially a good idea to split some of your remuneration package into a pension.

Use your capital expenditure allowance

If a contractor limited company invests significantly in capital equipment, there may be a strong taxation argument to allocate the spending over two or more years to take advantage of the £200,000 per annum annual investment allowance. (From January 1st, 2019, the annual investment allowance in capital expenditure rises to £1,000,000 for two years).

Use tax-free savings accounts

For basic rate taxpayers under the Personal Savings Allowance, the first £1,000 of interest income is tax free. For higher rate taxpayers, the allowance is £500. There is no allowance for additional rate taxpayers.

There is no interest on savings held at National Savings and Investments. A contractor can also choose to invest money in interest-bearing premium bonds. There is no tax to pay on interest earned from premium bonds and on any winnings on premium bonds.

Invest spare cash in special investment schemes

There are significant savings that can be made on capital gains tax and income tax on investments in companies registered by HMRC on the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and the Social Investment Tax Relief (SITR) scheme.

Or put your money into single premium investment bonds

Single premium investment bonds allow higher rate taxpayer contractors to not pay the tax on an investment until it has matured or the decision is made to cash it in. 5% of the value of investment can be taken out each year without tax being payable on the sum. For each year the 5% is not withdrawn, the allowance rolls over meaning that, after three years, 15% of the value of the investment is available to withdraw without having to pay tax on it.

Tax will need to be paid when the bond is cashed in if a contractor is a higher rate payer within that year. Tax can be avoided by ensuring that the bond is cashed in during tax years in which a contractor is a basic rate taxpayer.

The advice of an accountant or financial advisor should be sought when a contractor wishes to cash the policy in.

Members’ voluntary liquidations are a common way to extract profits

Many solvent contractor limited companies have a limited shelf life and, because of the minimal overheads and a tax-efficient strategy of cash extraction, a sizeable sum of money may still remain in the limited company’s account at the end of its useful life.

Rather than withdraw the cash in the account as a mixture of salary or dividends, there may be significant savings that can be made by winding the company up using a Members’ Voluntary Liquidation (MVL).

An MVL may bring a director the benefit of being able to take advantage of both Capital Gains Tax Entrepreneurs’ Relief and the annual capital gains tax allowance. Directors should seek advice from an accountant on whether this is a viable route and the potential for savings.

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The Pros of Using an Umbrella Calculator

There are many advantages to using an umbrella calculator for contractors.

Umbrella calculators allow you to quickly compare thousands of umbrella companies across the UK, offering a clear overview of what you will receive from the company, including everything from your take-home pay, what benefits you will receive, and what services the company will offer.

To help contractors find out more, Umbrella Supermarket outlines the main benefits to using an umbrella calculator in 2021.

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Umbrella vs Limited Company: What to know when making the move this new tax year

The 6th April 2021 marked significant changes to IR35 legislation which impacted thousands of self-employed, limited company contractors operating within the private sector.

In light of the changes that have now rolled out, many limited company contractors are understandably considering their options and thinking about making the move to umbrella this new tax year.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline what contractors need to know about making the move from limited company to umbrella in 2021, to help you get on the right track.

 

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Umbrella Company vs PAYE: What should you choose?

Umbrella company vs PAYE is a question asked by thousands of contractors.

After all, it’s a big decision to make that will have a direct impact on your contracting career and day-to-day life, so it’s not one that should be taken lightly.

To help every contractor make the right decision for them, Umbrella Supermarket has put together this insightful guide outlining the key differences between umbrella and PAYE and the advantages and drawbacks of each.

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How can I avoid IR35?

As a contractor, you will most likely know about IR35 and upcoming reforms from April 2021.

These changes to IR35 legislation are set to badly impact many self-employed contractors in the private sector, so thousands are understandably worried. After all, getting caught out by IR35 can mean you end up paying more in tax than you need at the same level as an employee, without receiving the benefits of being employed, such as statutory rights.

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Umbrella Company Fees: How Much Should You Pay?

When deciding which umbrella company to work with, the fees they charge will inevitably play an important role in the decision-making process.

Umbrella company fees are taken directly out of the contractor’s income, so it is only natural that contractors want to ensure they are getting a fair deal.

To help contractors understand umbrella company fees, from how they are charged, what they will receive in return, and how much they should be paying, Umbrella Supermarket outlines everything there is to know about umbrella fees in this handy guide.

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Pros and Cons of Limited vs. Umbrella

Big reforms to IR35 legislation are set to come into motion from 6th April 2021 which will impact the thousands of self-employed, private-sector contractors out there.

For this reason, many of the contractors that currently operate through a limited company will be considering the umbrella company route as an alternative.

If this is true for you, it’s important to do your research to find out whether limited company vs umbrella is the best option for you in 2021.

To help make the decision that little bit easier, in this guide Umbrella Supermarket outline the key differences between limited vs umbrella, so you can get on the right track.

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What Does the 2021 Budget Mean for Contractors?

On 3rd March 2021 Chancellor Rishi Sunak unveiled his Budget in the House of Commons, outlining the government’s tax and spending plans for the year ahead.

Sunak announced a variety of measures he will put into place to help businesses and jobs that have suffered through the pandemic, as well as outlining a plan for the long-term recovery of the economy.

However, the question many contractors will be asking is how the Budget will impact the

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5 Benefits to Working with an Umbrella Company

Contracting through an umbrella company has become an increasingly popular option for contractors across the UK in recent years. After all, it is a route that offers contractors a range of benefits over other paths such as working through PAYE or being self-employed.

 

 

ir35 reforms

Contractor’s Guide to IR35 in 2021

From April 6th 2021, reforms to IR35 legislation will come into force, impacting the lives of thousands of self-employed contractors.

Inevitably, contractors across the UK are concerned about upcoming reforms and how these will affect them. To help, in this guide, Umbrella Supermarket look at what these changes to IR35 entail and how they might impact you as a contractor in 2021.

 

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How to Compare Umbrella Company Fees

If you are considering joining an umbrella company in 2021, or have been contracting through one for a while and want to ensure you are getting a good deal, it is important that you know how to compare umbrella company fees.

What you pay in income tax and National Insurance will be the same regardless of which umbrella company you choose, however the fees the umbrella company charges can make a big difference to your take home pay.

At Umbrella Supermarket, we know that every contractor wants to get a fair deal. To help, we explain how umbrella company fees work and how you can compare them to find the best deal.

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Job Retention Scheme for Contractors in 2021

The COVID-19 pandemic has impacted workers across the UK and contractors have been no exception.

Many of the 1.77 million independent contractors have either lost work altogether or have had contracts put temporarily on hold leaving them in a tricky position.

Fortunately, many of these contractors are eligible for the government’s Job Retention Scheme otherwise known as furlough, introduced to offer financial support for businesses and workers. This has been an essential source of income for many who have lost contract work as a result of the pandemic.

As we experience a third national lockdown, the furlough scheme has now been extended until the 30th April. So, if you find yourself out of contract work or have projects on hold, Umbrella Supermarket are here to explain what the Job Retention Scheme is, how it works and what this means for contractors.