Income tax is perhaps one of the least understood and most confusing financial terms. The contemporary workforce contains employees and contractors. Being a skilled contractor is a rewarding career and can bring handsome financial benefits. However, there are tax consequences too. With proper planning, you can save a significant amount of money.
Here are some common questions the contractors might face while managing their taxes.
Should I set up a Limited Company?
This is the first step that a contractor should take so that they can maximize their disposable income within legal means. A Limited company is governed by the Companies Act 2006 and they are a separate entity. There will be additional responsibilities, however; the contractor would be able to save more taxes.
How about creating a business bank account?
Another pretty obvious but vital step; you should keep your personal account and your business account separate so that you can manage your business finances better.
What is IR35 and how to ensure compliance with the regulations?
It is a legislation tax that assesses the contractors based on the contractors. Usually, the client will determine your IR35 status. The main issue that you, as a contractor will face is that if you work via an umbrella corporation and Limited Corporation within the same year, it will result in a higher tax bill.
How much salary should a director have to optimize tax?
There are two scenarios of best salary levels. If there is more than one employee then the salary level is £12,210, in this case, you can claim an employee allowance. But if the director is the sole employee of the company, then the salary level is £8,840.
Can I pay dividends to my spouse/partner?
Many contractors opt to share limited firm ownership with a spouse or partner, especially if the partner has little or no income. The non-working (or low-earning) partner’s tax allowance can be utilised, resulting in a lower total tax rate on dividends. The first £2,000 of dividends, irrespective of your income, is tax-free. You can pay dividends to your spouse only if he/she is the shareholder of the limited company and avail of a £2,000 tax benefit
Can I claim Employers National Insurance?
You can claim Employers Class 1 National Insurance till the end of the financial year up to a limit of £4,000. You can claim for it even if your liability is lesser than £4,000
Which VAT scheme should I opt for?
The simple answer to the questions is VAT Flat Rate Scheme. This scheme is for businesses with a turnover of less than £150,000. Under this scheme, you have to pay a fixed VAT, It basically means that you charge the standard VAT rate of 20% but payback HMRC at the rate determined by HMRC based on your profession.
What items can I consider as eligible Expenses-
Expenses through your limited company brings in tax relief. However, all expenses are not eligible so it is wise to know.
Office expenses- Printers and inks, Phone, internet bills, software (that are used for less than 2 years, stationery, postal items etc.)
Office Premises- Security, maintenance, insurance, rent, repair etc.
Subscriptions- You can include costs for subscriptions to any professional membership or trade body.
Travel- Official Purpose Vehicles, repair, fuel, maintenance, insurance.
Stocks and raw materials- You cannot put forward any claim for items for personal use. You have to include materials and stocks used for official purposes and the direct costs that have arisen from them.
Financial and Consultation costs – In case you needed to hire any financial, legal, or other experts, you can include their costs.
Employee Costs- Salaries are allowed expenses and you can also include costs for training, bonuses, contributions towards pension etc.
How CoreAdviz can help you?
Being tax efficient needs proper management, time, and expertise. Let us manage your taxes efficiently while you focus on your business.
Paperwork, finances, accounts, and taxes may all be overwhelming for you. We at CoreAdviz Accountants, help contractors and small company owners like you manage the taxes and stay in charge of your finances. We assist you in removing the worry and strain of paperwork, accounting, and regulations so that you can concentrate on running your business.