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Introduction
Here are our small business tax tips for UK contractors in 2023/24. If you are looking for contractor tax help and advice, this article contains lots of independent contractor (UK) tax tips as well as many genuine tax tips for business owners in general. We will demonstrate how to save tax as a contractor and share some good small business tax advice (UK) along the way. These contractor tax saving tips, as well as tax advice for independent contractors, mainly apply to those who work through a limited company. However, many of the business tips and advice apply to other business owners as well. This guide is also very useful for new business owner tax tips including when you first start out as a limited company contractor.
Initial thoughts
UK contracting compared to being employed
When you are employed full-time or work through an umbrella company, your employment status is that of a PAYE employee. Under this scenario, your employer takes care of the administration and financial side. On the other hand, when you are a business owner, you are in control of the administration and finances. Therefore, when you are working as a contractor, UK tax planning tips and advice can help you a great deal. Besides having the opportunity to do some small business tax planning, there are also various tax benefits of being a contractor that are not available when you are employed.
Therefore, as part of our UK tax tips for independent contractors, we will investigate various areas of contractor tax planning. We will also consider how to pay less tax as a limited company and how to save tax as a contractor.
Make savings
When you are an individual, you can look to make personal savings, wherever they are available. Likewise, when you run a business, you can also look to make savings in your day-to-day operations with some handy UK tax tips and advice. These savings will come by way of claiming all legitimate expenses and learning of any other available small business tips (UK). As a result, some good tips for tax planning and operating efficiently will help reduce your tax bill for the business.
Much of this general limited company contractor tax advice and tax planning for small business will also apply to directors of UK small companies. Many areas in these tax tips for small business owners apply to sole traders and partnerships too. We will demonstrate ways to reduce tax (UK) for your business. In addition, we will show how you can save tax and operate tax efficiently with our UK tax tips for small business owners. Just like making personal savings as an individual, you can also make business savings when you take the time to consider contractor tax planning tips and how to run your UK business tax efficiently.
Running your own company and UK tax tips for business owners
When you are an independent contractor or small UK business owner, work can be a challenge each day. This can also add to the stress when you are already running a busy life outside of work.
This guide can be handy, and the contracting advice below shows how you can work and operate efficiently if you take on board many of the tax savings tips for small business. Therefore, when you run your own company, if you utilise many of the independent contractor tax tips and ideas below, they will stand you in good stead and help you save tax.
Further initial thoughts
UK contracting industries
There are all sorts of contracting industries, and these include:
- IT contracting.
- Management contracting.
- Mechanical contracting.
- Engineering contracting.
- And many more.
This tax tips for contractors’ guide is suitable for all UK contractors and small business owners with their own companies.
Besides our tips for tax saving for your UK contractor limited company, we also have a first-timer’s guide to contracting in the UK. This gives a complete overview of what to consider when you begin to run your own contractor limited company and start out for the first time. Besides planning ahead, there are many other things to consider when you start your business. This includes business banking and choosing an accountant. It also includes deciding on your accounting system, keeping accurate records and many more considerations. The first part of our contractor tax tips will include advice which covers salary, dividends, and tax allowances.
Individual tax tip
Although this is not beneficial to everyone, you could check to see if you can claim the UK marriage allowance. This is available to those with a spouse, including civil partners.
It is beneficial to claim for this when one partner has an income within the basic rate tax band (income up to £50,270 pa), whilst the other partner is not using up all of their personal tax allowance (this is currently £12,570 pa).
UK tax tips for contractors
1 Save tax by paying yourself a tax-efficient mix of dividends and salary
An important piece of small company tax advice to consider, when you are a director of your own company, is you can choose what salary to pay yourself. This is one of the best tax saving tips as a UK contractor because when you work through an umbrella company or are employed you do not have a choice. Therefore, when you do not have your own company and you earn under £50,270 in 2023/24, you will be a basic rate taxpayer. If you earn above £50,270 you will be a higher or additional rate taxpayer. Therefore, to summarise, in 2023/24:
- Above £50,270 but less than £125,140 -you will be a higher rate taxpayer.
- Above £125,140 -you will be an additional rate taxpayer.
In the tax year 2023/24, every individual has a tax-free personal allowance of £12,570. In addition, you also have a dividend allowance of £1,000 (£2,000 in 2022/23).
Suggestion
A gross salary of £1,047.50 per month equates to £12,570 per annum. This is the same as your personal allowance, however £1,048 is where the NI Primary Threshold now falls following the government’s lining up of the personal allowance and NI threshold.
An optimal salary to take now in 23/24 is £1,047.50 per month and your company will save Corporation Tax (CT) 19% or 25% on the salary cost. This level of salary is optimal if you have no other income that will use up your personal allowance. Such additional income would include rental profits, self-employment profits, pension income etc. If you have other income, a lower amount such as £758 per month (which is the Secondary Threshold -this is the amount where the employer starts to pay NI) will be the optimal salary. In fact, you could also pay yourself the Lower Earnings Limit (LEL) which is £533 per month. However, to ensure that your NI contributions count as a `qualifying year’ for state pension purposes, you need to pay yourself a salary of £533 or more for the full twelve months of the tax year.
If your company is not currently trading and therefore not paying Corporation Tax, you should also consider a lower monthly salary, such as the £758 or £533 suggested above.
Individuals should aim to attain 35 `qualifying years’ during their working life. When they do this, they qualify for the full UK state pension when they retire.
Dividends that fall within your basic tax rate are taxable at 8.75%.
Tax efficiency considerations
As a limited company contractor, to be tax-efficient, you may decide to take a gross salary of:
- £12,570 per annum (£1,047.50 per month); or
- £9,096 per annum (£758 per month).
You can then take the rest of your income as dividends.
If you are earning enough to take a gross income of £50,270 from your company, and your only income is salary and dividends, the tax payable under the above example via your Self-Assessment Tax Return would be £3,211.
You need to look at your overall picture if you have other income. Basically, you can do this by taking all of your other income into account. You can discuss this with your accountant and decide the most tax-efficient mix of salary and dividends.
2 Tax tips for contractors -minimise your National Insurance (NI) contributions
Salaries incur National Insurance, and the higher your salary is, the more NI you and your company will pay. Some good small business tax advice is if you decide to pay yourself on a tax-efficient basis and take a salary as in the example in the above point, you will minimise the NI you incur. This can be the best way to pay contractors and as a result, you can take the rest of your income as dividends.
3 Tax tips for small business owners -be aware of how tax bands & allowances work
This is one of the important small business tax tips to consider; therefore, please take note here. You do not need to take all the dividends available in the year you earn them. The profit in a company is taxable in the year the business makes it. Any post-tax income you do not pay as dividends is carried forward to the following year. It is then available to be paid in the future.
Another important point in these contractor tips is company income is not taxed twice. It is only taxable in the year that the business earns it.
You may incur higher tax rates if you draw out all the dividends available. The rates that are payable if you do are:
- 33.75% on gross income above £50,270; and
- 39.35% on gross income above £125,140 (above £150,000 in 2023/24).
4 Tax tips for contractors -do not draw more dividends than you are legally allowed to take
When you run your own company, the business, like you, has tax bills. UK companies pay Corporation Tax (CT). Your business also has other taxes, which are:
- PAYE and National Insurance contributions if you run a PAYE scheme.
You should also ensure that you only draw out amounts as dividends after allowing for your company’s tax bills.
If you draw out more than is allowed, the surplus drawings over profit are illegal dividends. As a consequence, your dividends would then need to be restricted. In turn, this would create an overdrawn director’s loan account. This loan can then result in extra tax to pay. This additional tax will depend on how high the borrowing is and how long it is left owing.
5 Small business tax advice (UK) -VAT
VAT sub-scheme
Another important piece of tax advice for business owners is to decide which VAT scheme you will use. Nowadays, most UK contractors can save tax by operating under the standard VAT scheme. This is also known as the standard scheme.
Recently, the VAT Flat Rate Scheme (FRS) was more tax advantageous. However, the government changed the rules in April 2017. Under FRS, most contractors now pay over 16.5% Flat Rate VAT on their gross income. This result equals an actual VAT rate of 19.8% on the consultancy fees you charge. This % is comparable to the usual 20% VAT they charge -an actual saving of £20 per £10,000 that is invoiced.
If you operate under the standard VAT scheme, you can reclaim the VAT within your expenses on your VAT returns. For most contractors, this should not be a complicated job. However, this involves a little more work when you operate under the standard VAT scheme. However, you will save tax or be better off operating under this scheme.
Cash or invoice basis
Also, a business can report its VAT on a cash basis or invoice basis. However, you are only compelled to comply with the latter if you are a large business.
Operating on a cash basis means paying over the VAT you invoice to your customers once it is received. In addition, you can only reclaim VAT on the invoices from suppliers when you have paid them.
Therefore, reporting your VAT on a cash basis helps improve your company’s cash flow.
Making Tax Digital
Another consideration is that businesses registered for VAT must now comply with MTD. This stands for Making Tax Digital.
6 Contractor tax tips -further considerations
Another one of our important tax savings tips for small business is ensure that you receive tax relief on all genuine business expenses. Therefore, here we look at another one of the key tax tips for UK contractors and small business owners. This key small business tax advice ensures that you claim for all the business expenses you are legally allowed to. This will help minimise how much Corporation Tax your company pays and is one of the best ways on how to save tax as a contractor. The business will pay its Corporation Tax bill after it completes and files its future company tax returns.
Please ensure you obtain a receipt for any business expenses you incur. Your company can then repay these expenses to you. Indeed, some UK contractors and business owners do not do this; therefore, it is key that you do. Otherwise, you are paying for these out of your own post-tax income.
Some expenses with specific rules attached to them
Besides the usual business trading expenses, where you meet specific criteria, you can also claim as part of your independent contractor business expenses:
In addition, and again after meeting specific criteria, you may be able to claim for:
With all business expenses, you should collect and save receipts. This can be either a paper receipt or an electronic one (or a mix of these methods). The receipts are proof that you have incurred the expenses.
7 Company car or private car when you are contracting?
Another one of our important tips for independent contractors is to consider how you get around in terms of driving. In most cases, you are more tax-efficient to keep your car as a private vehicle. When you do this, you can claim mileage at HMRC’s allowed rates.
If you run them through your company, most vehicles will cost a fair amount in tax. This tax is upon the benefits in kind that are applied to a company car. These are usually more than the CT your company will save on car costs and running costs.
However, nowadays, if you have a hybrid or electric vehicle, you may be better off running a company car. There are currently some good tax breaks for hybrid vehicles. Therefore, it’s certainly worth considering one of these vehicles if you plan to run a company car through your business.
8 Tax tips for contractors -paying your spouse a salary
Another one of the business tax saving tips is to consider paying your spouse a salary. Indeed, your company can pay your partner a wage if they are doing some work for your company. This is one of our independent contractor tips to consider, especially if your spouse may be doing administration-type jobs. This could include dealing with e-mails and answering phone calls. They could also be opening the post, updating your accounting system, etc.
When your company pays a salary to your spouse or partner, their wage will reduce the amount of company profit that is subject to CT.
Before considering the above, you ought to consider their other income. This is because a salary from your company could affect their overall tax bill.
As part of your personal tax return preparation, and on an ongoing basis where appropriate, you could consider making use of the transfer of the marriage allowance. This is only beneficial in certain scenarios; however, you will benefit from this if you fall into one of the scenarios.
9 Tax tips for small business owners -stay informed of your company’s ongoing financial position
Here is some further good small business tax advice and essential tax tip for UK contractors and small business owners. Once you have taken your salary and dividends, reimbursed expenses and paid any other bills, you will have a balance left in your company bank account(s).
You will need to know how much of the bank balance to save for company taxes and other bills. After considering all of this, you should be able to determine how much of the balance is still available for you.
Most online accounting software systems, including FreeAgent, will provide this information at a glance.
10 Make sure you do not fall foul of the 24-month rule for travelling expenses
Another one of our important limited company contractor tax tips is you can claim your travel expenses to and from work and to and from other work sites. However, another one of our contractor’s tips is you need to be aware of the 24-month rule. This rule states that as soon as you know you will be at a worksite (that you spend 40% of your working time or more) for longer than 24 months, you can no longer claim expenses for that site.
Being able to claim your travel expenses can have a significant effect on your net income. The higher the cost of your travel expenses, the more influential the impact will be if this affects you.
11 Small business tax advice (UK) -save tax by making sure you hold your `annual event’
Every year, you can claim up to £150 per employee for an `annual event’ or `events’.
This event could be the annual Christmas party or a series of events during the year.
The party is fully tax-deductible, providing that the amount does not exceed £150 per employee.
12 Tax tips for contractors -save tax by claiming trivial benefits
This is a less well-known tax saving tips for small business owners and contractors. Your company can pay you and any of your employees `trivial benefits’ every year. Indeed, this is another one the tax benefits of independent contractor status. What’s more, individual amounts paid for trivial benefits must not exceed £50, including VAT.
There is a total cap of £300 per annum if the employer is a `close company’ (companies with less than five shareholders). When the payment is to an individual who is a director, another office holder, or a member (shareholder), including their family or household.
13 Tax savings tips for small business -save tax when you claim your mobile phone costs through your business
If you use your mobile phone for work reasons and there is only a `token’ element of personal usage, you can claim your mobile phone costs as a business expense.
When you claim mobile phone costs, you should ensure that the bills and account are in your company’s name.
14 Tax tips for contractors -claim for the use of your home as an office
A top piece of small business tax advice for independent contractors is the government increased the amount you can claim for working from home to £6 per week on 6 April 2020. You can claim for this, and perhaps more if you do a lot of work from home.
If you have an office separate from your home address, you can claim for the rent, business rates, utility costs and any service charges.
15 Tax tips for small business owners -consider paying into a company pension scheme
If you make pension contributions into a company pension scheme, this is a tax-deductible expense. As a result, it will save your company CT.
This is another one of the key tax benefits for independent contractors. When you pay into a pension scheme through your company it is a way of extracting further funds without incurring higher tax rates.
16 Small business tax tips -invest in a good accountant
Investing in a good accountant specialising in the contracting industry is a good idea. We detail the things to consider if you want to change your accountant.
17 Tax tips for contractors -make tax and other savings with certain financial products
When you are a contractor, you will lose certain benefits that you receive as an employee. These may include income protection, health insurance, sick pay etc. A good way to protect yourself is to get your contractor finances in order. When you purchase any financial products, the provider should be regulated by the Financial Conduct Authority.
Relevant Life Insurance (RLI) is different from standard life insurance. If you take RLIs out, it is tax-deductible through your company. This also works out much less expensive when you pay for it through your company over the policy term. This is another example of how to save tax as a contractor.
Secondly, as a contractor, if you cannot work, you will no longer be able to claim statutory sick pay. Therefore, Income Protection will provide you with added peace of mind if you cannot work in the future.
A valued partner of Contractor Advice UK for your contractor finances is Broadbench. They offer both of the above products and have helped many website members. If you are interested, there are forms you can complete at the bottom of these articles. These articles can be found on the finances page.
Final thoughts
The ideas shown in this small business tax tips guide will show you how to save tax as a contractor or UK small business. However, with these tax tips and tax advice for independent contractors we do not cover absolutely everything here. On the other hand, we do include many tax saving ideas for UK limited company contractors. What’s more, many tips above will help you reduce your overall tax calculation as a UK contractor or UK small business.
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