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:
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
