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Introduction
Here’s our top tax tips for contractors (UK) guide for 2023/24. Indeed, we include tips for UK contractors as well as UK small business tax tips. If you’re looking for contractor tax help and advice, we include lots of independent contractor (UK) tax tips. Also, there’s many tax tips for business owners in general. We’ll demonstrate lots of tax-saving tips and how to save tax as a contractor. We’ll also explain good small business tax advice (UK) along the way. If you’re IT contracting (UK) or contracting in another industry, these UK tax saving & planning ideas will help maximise your take-home pay when implementing many of them. We include many tax tips for individuals who run their own business and tax optimisation (UK) ideas.
These contractor tax saving (UK) tips and tax advice for independent contractors, mainly apply to those working through a limited company. When your UK tax structure setup is that of a limited company, there’s many contractor tax benefits and tax reduction tips you can utilise. These tax benefits of being an independent contractor enable you to claim for some costs that aren’t available when self-employed. In turn, it results in Corporation Tax savings. Also, you can pay yourself tax-efficiently to minimise your overall taxes as a contractor. We’ll look at how to save tax as a limited company and tax planning for business owners. When you use these ideas in respect of tax planning for contractors, you’ll pay less tax as a contractor.
Initial thoughts
First thoughts on save tax in UK
Our tax tips for small businesses guide shows you how to save tax as an independent contractor company. We also set out some good ideas in respect of tax planning for small business owners and contracting individuals. If your work is in IT (or any other industry), it will help reduce your IT contractor tax liabilities. Along the way, you’ll make small business tax savings. However, many of the contractor business tips and advice apply to other business owners as well. As a result, it will help them make savings on small business tax (UK) too.
Furthermore, this guide is also very useful for new business owner tax tips (UK). This includes when you first start out as a limited company contractor. Our small business tax saving tips guide explains the best way to pay independent contractors. It also shows how to reduce your small business tax rate (UK). In addition, we will cover what you can include in your tax write offs (independent contractor). Overall, we show how to make savings in many other areas when you are contracting.
UK contracting compared to being employed
When you’re employed full-time or work through an umbrella company, your employment status is that of a PAYE employee. Let’s now consider do contractors get taxed more than someone who is employed or working through an umbrella arrangement. Under this scenario, your employer takes care of the administration and financial side. In addition, a person will pay tax and NI on their salary under the PAYE system. When considering do contractors pay less tax, the answer is yes due to utilising a mix of salary and dividends.
On the other hand, when you’re a business owner, you are in control of the administration and finances. Therefore, when you’re working as a contractor, UK tax planning (UK) tips and advice can help you a great deal. As a contractor, you have 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.
In our UK tax tips for independent contractors, we’ll investigate various areas of contractor tax planning. We’ll also consider how to pay less tax as a limited company and how to save tax as a contractor.
Make savings
As an individual, you can make personal savings, wherever they’re available in terms of your household bills. Also, you can maximise interest on your own savings. For example, you can open a personal savings account or a Stocks and Shares ISA.
Likewise, when considering how to reduce taxes as an independent contractor, you can make savings in your day-to-day operations. Some handy UK tax tips and advice help you achieve this. When considering how to pay less taxes as an independent contractor, make sure you claim your legitimate business expenses. Furthermore, you can learn about any other available small business tips (UK). Consequently, some good tips for tax planning and operating efficiently help reduce UK tax for small business. Our tax tips for contractors’ and how to save tax (UK) guide, shows you how to make savings. Indeed, we’ll demonstrate the ways to save tax when running your own UK company.
Much of our limited company contractor tax advice and tax planning for small business also applies to small company directors. Many of our tax tips for small business owners apply to sole traders and partnerships too. We’ll demonstrate ways to reduce tax (UK) for your business. Furthermore, we’ll show how to save tax and operate tax efficiently with our UK tax tips for small business owners. Besides making personal savings as an individual, you can also make business savings. Please read on to learn our 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 run a UK independent contractor company or small UK business, 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. As a result, you will make savings 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 UK independent contractor tax tips and ideas below, they will stand you in good stead and help you save tax.
Further initial thoughts on saving tax in UK
UK contracting industries
You may run your own UK IT contractor company or be a small business contractor in a different industry. Indeed, there’s all sorts of small business contractors who work in all sorts of contracting industries and these include:
- IT contracting.
- Management contracting.
- Mechanical contracting.
- Engineering contracting.
- And many more.
Our tax tips for contractors are suitable for all UK contractors and small business owners with their own companies. Indeed, it covers IT contracting tips as well as tips for all other contractors and UK small businesses.
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 guide on contractor small business tips and advice 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 and contractor tax advisor. It also includes deciding on your accounting system, keeping accurate records and many more considerations. The first part of this contractor tax tips guide will include advice which covers salary, dividends, and tax allowances.
Individual tax tip
One of the tax saving tips for individuals is to consider if you can claim for the UK marriage allowance. 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 for contractors and part of the financial planning for independent contractors is when you are a director of your own company you can choose what salary to pay yourself. Basically, when we consider how to save on taxes as an independent contractor, this is one of the best tax saving tips (UK) 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
When we consider a UK contractor and taxes, a gross salary of £1,047.50 per month equates to £12,570 per annum. This is the same as your personal allowance therefore there will be no contractor income tax on your salary unless you have other income such as rental profits or significant bank interest, etc. 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 and one of our income tax planning tips in 23/24 is to take a salary of £1,047.50 per month. Indeed, when you take this level of salary, your company will save UK contractor tax by way of a Corporation Tax (CT) saving of 19% or 25% on the salary cost. This level of salary is optimal as part of a salary and dividends strategy for contractors 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.
When you have other taxable income
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 and as a result, this will reduce your contractor taxation in the UK.
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 contractor tax (UK) which is 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 or contractor tax advisory who will look after your independent contractor tax requirements and decide the most tax-efficient mix of salary and dividends.
2 Tax tips for contractors -minimise your National Insurance (NI) contributions
When we investigate how to save taxes as an independent contractor, salaries incur National Insurance. What’s more, the higher your salary is, the more NI you and your company will pay. Indeed, some good UK contractor tax advice (small business) 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 tax tips for contractors to consider; therefore, please take note here. One of the key income tax saving tips is 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:
- 75% on gross income above £50,270; and
- 35% on gross income above £125,140 (£150,000 in 2022/23).
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.
A UK contractor should also ensure that they only draw out amounts as dividends after allowing for the company contractor’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. When we look at how to save money on taxes as an independent contractor, 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 -claim for all genuine business expenses
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 best tax tips for consultants and UK contractors and small business owners. This key tax advice for small businesses and UK contractors ensures that you claim for all the business expenses you are legally allowed to. This will help reduce the tax for contractors (UK) by minimising how much Corporation Tax their company pays. Indeed, this in itself is one of the best ways which demonstrates 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
Another small business tax tip is besides the usual business trading expenses, where you meet specific criteria, you can also claim as part of your UK independent contractor business expenses. In turn, these will help reduce tax for small businesses (UK):
In addition, another way to reduce tax for small business (UK) and again after meeting specific criteria, you may be able to claim for:
When you claim for the above, it will help reduce your contracting tax. As 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.
You may be planning on making capital expenditure purchases for your business in the near future. Therefore, a tip in respect of year-end tax planning for small business owners is to purchase the assets before your company year-end. When you do this, the company will receive the tax relief on the current year’s tax bill, rather than the tax bill for the following year.
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 reduce your contractor taxes by claiming 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 and idea to help reduce your independent contractor taxes (UK) 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 UK 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. Indeed, this will also help reduce the tax for contractors. However, another one of our contractor’s tips is you need to be aware of the 24-month rule for contractors. This is one of the tax rules for contractors and 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’
Another way to save taxes for contractors is every year, you can claim up to £150 per employee for an `annual event’ or `events’. Basically, this event could be the annual Christmas party or a series of events during the year. Indeed, the party is fully tax-deductible and one of the tax write offs for independent contractors, providing that the amount does not exceed £150 per employee.
12 Tax tips for contractors -save tax by claiming trivial benefits
This is one of the less well-known UK tax saving tips for small business owners and contractors, however it also helps to reduce contractor limited company tax. 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
Another one of the tax deductions for contractors in the UK are phone charges. Indeed, 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. In addition, 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. Basically, this is another tax write off for independent contractors and 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’re a contractor, you’ll lose certain benefits 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.
As a contractor, your contract will state which insurances you need in place for your work. This is likely to include Professional Indemnity insurance but it could include other contractor insurances too. Through our website you will receive a contractor discount when you get contractor business insurance in place.
Relevant Life Insurance (RLI) is different from standard life insurance. If you take RLIs out, it’s 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.
As a contractor, if you cannot work, you’ll 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’re interested, there’s forms you can complete at the bottom of these articles. These articles can be found on the finances page.
Final thoughts
The ideas within our tax tips for contractors demonstrate how to save tax as a contractor or UK small business. However, when we consider how to reduce tax as a contractor, within these tax tips (small business) 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. Finally, many tips above will help you reduce your overall tax calculation as a UK contractor or UK small business. However, you should also look at your overall tax position with your accountant.
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