Tax tips for contractors

Share This Guide, Choose Your Platform!

Table of Contents

Introduction

Here’s our top tax tips for contractors (UK) guide for 2024/25, which will help you reduce your tax bill. 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 many independent contractor (UK) tax tips. What’s more, there are many general tax tips for small business owners. We’ll demonstrate many tax-saving tips and how to save tax as a contractor. We’ll also explain good small business tax advice (UK) as part of the guide. If you’re IT contracting (UK) or contracting in another industry, these UK tax saving & planning ideas will help increase your take-home pay when implementing many of them. We’ll include tax tips for individuals who own businesses and some 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 of a limited company, you can utilise contractor tax benefits and tax reduction tips. These tax benefits of being an independent contractor enable you to claim for some costs that aren’t available when you’re self-employed. In turn, it results in Corporation Tax savings. In addition, you can pay yourself tax-efficiently to minimise your overall taxes as a contractor. Therefore, we’ll research how to save tax as a limited company and tax planning for business owners. Importantly, when you use these ideas regarding tax planning for contractors, you’ll pay less tax as a contractor.

Initial thoughts 

First thoughts on how to save tax in the UK 

Our tax tips for small businesses guide is designed to provide practical and effective strategies to help you save tax and increase your take-home pay as an independent contractor. We’ve outlined effective tax planning strategies that can reduce your tax liabilities, particularly if you’re an IT contractor or work in another industry. By following these tips, you can make significant small business tax savings. And the best part? Many of these contractor business tips and advice are also applicable to other business owners, offering them the opportunity to save on small business tax (UK) as well.

Furthermore, this guide is handy for new business owners who need tax tips. This includes when you first start 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). We’ll explain what you can include in your tax write-offs (independent contractors). Overall, we’ll show how to make savings in many other areas when you’re contracting. Here’s a list of tax planning tips for contractors from another website. As you’ll see, our guide goes into much more detail.

UK contracting versus working under employment

When employed full-time or through an umbrella company, your employment status is a PAYE employee. Let’s now consider whether contractors get taxed more than someone employed or working through an umbrella arrangement. Under this scenario, your employer manages the administration and finances. In addition, a person under PAYE will pay tax and NI on their salary. When considering whether contractors pay less tax, the answer is yes due to utilising a mix of salary and dividends.

You control your company’s administration and finances as a UK business owner. Therefore, when working as a contractor, UK tax planning (UK) tips and advice can significantly help you. As a contractor, you do some small business tax planning. There are also various tax benefits of being a contractor unavailable when employed.

In our tips for independent contractors guide, 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.

How do you make savings & maximise your income?

As an individual, you can make personal savings wherever they’re available regarding your household bills. What’s more, you can consider how to generate extra income from your savings. This could come by maximising any interest on dividend income by looking into savings and investment ideas. For example, you can open a personal savings account, Cash ISA or a Stocks and Shares ISA.

Likewise, you can save money in your day-to-day operations by considering how to reduce taxes as an independent contractor. Some handy UK business tips and advice will help you achieve this. When considering how to pay less taxes as an independent contractor, you should ensure you claim your legitimate business expenses. Furthermore, you can investigate and learn other available small business tips (UK). Basically, good tips for tax planning and operating efficiently help reduce UK tax for small businesses. This contractor guide shows how to make business savings and how to save tax (UK). Indeed, we’ll demonstrate how to reduce tax when running a UK company.

Much of our limited company contractor tax advice and tax planning for small businesses applies to small company directors. Many of our tips and advice also apply to sole traders and partnerships. 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 make business savings, too. Please read on to learn our contractor tax planning tips and how to operate tax efficiently.

Run your own company & tips for business owners

Working can be a daily challenge when you run a UK independent contractor company or small UK business. This can add to the stress when you’re already running a busy life outside work.

This guide is handy, and the contracting advice below shows how to work and operate efficiently. As a result, you’ll make savings if you take on board many of the tax savings tips for small businesses. Therefore, when you run your own company, if you utilise many of the UK independent contractor tips and ideas below, they’ll stand you in good stead and help reduce your tax exposure.

Further initial thoughts on saving tax in the 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 are all sorts of small business contractors who work in many different contracting industries, and these include:

  • IT contracting.
  • Management contracting.
  • Mechanical contracting.
  • Engineering contracting.
  • And many more.

Our tips guide suits all UK contractors and small business owners with their own companies. Indeed, it covers IT contracting tips and tips for all other UK contractors and small businesses.

Besides our tips for tax-saving for your UK contractor limited company, we 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 for the first time. Besides planning, there are many other things to consider when starting your business. This includes business banking and choosing an accountant or contractor tax advisor. It includes deciding on your accounting system, keeping accurate records and many other considerations. The first part of this guide will consist of advice which covers salary, dividends, and tax allowances.

An individual tax tip 

One of our tax-saving tips for individuals is to consider claiming the UK marriage allowance. Although this isn’t available 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’s 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 isn’t using up all their personal tax allowance (this is currently £12,570 pa).

UK tax tips for contractors 

1 Reduce tax when you pay a tax-efficient mix of dividends & salary 

An essential piece of small company tax advice for contractors and part of the financial planning for independent contractors is that when you’re 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, it’s one of the best tax-saving tips (UK) for a UK contractor because when you work through an umbrella company or are employed, you don’t have a choice. When you don’t have your own company and earn under £50,270 in 2024/25, you’ll be a basic rate taxpayer. If you earn above £50,270, you’ll be a higher or additional rate taxpayer. Therefore, to summarise, in 2024/25:

  • You’ll be a higher rate taxpayer if you earn above £50,270 but less than £125,140.
  • You’ll be an additional rate taxpayer if you earn above £125,140.

In the tax year 2024/25, every individual has a tax-free personal allowance of £12,570. In addition, you have a dividend allowance of £500 (£1,000 in 2023/24).

Suggestion

Considering a UK contractor and taxes, a gross salary of £1,047.50 per month equals £12,570 per annum. This is the same as your personal allowance; therefore, on a salary of this level, there’ll be no contractor income tax on your salary. That’s unless you’ve other income, such as rental profits or significant bank interest. £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 2024/25 is to take a salary of £1,047.50 per month. Indeed, when you take this salary level, your company saves UK contractor tax through a Corporation Tax (CT) saving of 19% or 25% on the salary cost. This salary level is optimal as part of contractors’ salary and dividends strategy if you’ve no other income that uses up your personal allowance. Such additional income could include rental profits, self-employment profits, pension income, etc.

What do you do when you have other taxable income?

If you have other income, a lower salary, such as £758 per month (the Secondary Threshold -the amount where the employer starts to pay NI), is the optimal salary. You could even pay yourself the Lower Earnings Limit (LEL), which is £533 per month. Basically, to ensure your NI contributions count as a `qualifying year’ for state pension purposes, you should pay yourself a salary of at least £533 per month for the full twelve months of the tax year.

If your company isn’t currently trading and therefore not paying Corporation Tax, you can 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.

In 2024/25, dividends which fall within your basic tax rate are taxable at 8.75%.

Tax efficiency thoughts

As a limited company contractor, to be tax-efficient, you may decide to take a gross salary of either:

  • £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, reducing your contractor taxation in the UK.

Suppose you’re 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) payable under the above example via your Self-Assessment Tax Return is £3,211.

When you have other personal income, you must consider your overall picture. You can do this by considering all your other income before deciding what company income to take. Indeed, you can discuss this with your accountant or contractor tax advisory, who handles your independent contractor tax requirements. As a result, you can decide on the most tax-efficient mix of salary and dividends.

2 Tax tips for contractors -minimise 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 that if you decide to pay yourself on a tax-efficient basis and take a salary as in the example in the above point, you’ll 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 UK tax bands & allowances work

This is one of the important contractor tips; please note this. One of the key income tax saving tips is that you don’t have to take all the dividends available in the year your company generates the profits. The profit in a company is taxable in the year the business makes it. Any post-tax income you don’t pay as dividends is carried forward to the following year. It’s then available to be paid in the future.

Another important point in these contractor tips is that company income isn’t taxed twice. It’s only taxable in the year the business earns it. Therefore, you may incur higher tax rates if you draw out all the dividends available. The rates payable if you do are:

  • 75% on gross income up to £50,270;
  • 75% on gross income above £50,270; and
  • 35% on gross income above £125,140. 

4 Tax tips for contractors -don’t overdraw your dividends 

When you run your own company, the business, like you, has tax bills. UK companies pay Corporation Tax (CT). Your business has other taxes, too, which are:

  • PAYE and National Insurance contributions if you run a PAYE scheme.

A UK contractor should ensure they draw out 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. Consequently, your dividends must then be restricted. As a result, this will create an overdrawn director’s loan account. This loan can then result in extra tax to pay. The additional tax will depend on how high the borrowing is and how long it’s left owing.

5 Small business tax advice (UK) & tips on VAT 

VAT sub-scheme

Another important piece of tax advice for business owners is to decide which VAT scheme you’ll 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.

The VAT Flat Rate Scheme (FRS) was more tax advantageous in previous times. 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 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 shouldn’t be a complicated job. However, operating under the standard VAT scheme involves a little more work. As a result, you’ll reduce tax or be better off operating under this scheme.

Should you use cash or invoice basis for VAT?

A business can report its VAT on a cash basis or invoice basis. However, the invoice basis of VAT reporting only applies if you’re a large business. As a result, most contractors can use the cash basis method.

Operating on a cash basis means paying over the VAT you invoice to your customers once it’s received. What’s more, you can only reclaim VAT on the invoices from suppliers when you’ve 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 that register for VAT must now comply with MTD, which stands for Making Tax Digital.

6 Tax tips for contractors -claim all genuine business expenses 

Another one of our essential tax savings tips for small businesses is to ensure you receive tax relief on all genuine business expenses. Therefore, we now look at another of the best tax tips for consultants and UK contractors. This key tax advice for small businesses and UK contractors ensures you claim for all the business expenses you’re legally allowed to. This will help reduce the tax for contractors (UK) by minimising how much Corporation Tax their company pays. Indeed, this is one of the best ways to demonstrate how to make savings when contracting. The business will pay its Corporation Tax bill after it completes and files its future company tax returns.

Ensuring you obtain a receipt for any business expenses you incur is another of our contractor tips. Your company can then repay these expenses to you. Indeed, some UK contractors and business owners don’t do this; therefore, it’s vital that you do. Otherwise, you’re paying for these out of your own post-tax income.

Which expenses have specific rules?

Another small business tax tip is that besides the usual business trading expenses, where you meet specific criteria, you can claim other costs as part of your UK independent contractor business expenses. In turn, these will help reduce taxes for small businesses (UK):

Another way to help reduce tax for small businesses (UK) and again after meeting specific criteria, you may be able to claim for:

When you claim for the above, it’ll 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’ve incurred the expenses.

You may be planning on making capital expenditure purchases for your business soon. Therefore, a tip regarding year-end tax planning for small business owners is to purchase the assets before your company or business year-end. When you do this, the company will receive the tax relief on the current year’s tax bill rather than on the tax bill for the following year. 

7 Tax tips for contractors -should you use a company or private car when contracting?  

Another of our important tips for independent contractors is to consider how you get around to your work locations. In most cases, it’s more tax-efficient to keep your car as a private vehicle and use it for business journeys. Doing this will reduce your contractor taxes by claiming mileage at HMRC’s allowed rates.

If you run a car through your company, most vehicles cost a fair amount in tax. UK car tax is based upon the benefits in kind that apply to a company car. These are usually more than the CT your company will save on the vehicle and its running costs.

However, nowadays, if you run a hybrid or electric vehicle, you may be better off with a company car. Currently, there are some excellent tax breaks for electric and hybrid vehicles. Therefore, if you plan to run a company car through your business, one of these vehicles is worth considering. 

8 Tax tips for contractors -pay your spouse a salary 

Another of our business tax saving tips 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 work for your company. This is one of our UK independent contractor tips to consider, especially if your spouse may do administration-type tasks. Such tasks could include dealing with e-mails and answering phone calls. It could also include opening the post, updating your accounting system, etc.

When your company pays your spouse or partner a salary, their wage will reduce the profit subject to CT.

Before considering the above, you ought to consider their other income. A salary from your company could affect their overall tax bill.

You could consider using the marriage allowance transfer as part of your personal tax return preparation and on an ongoing basis where it is available. As mentioned earlier, this is only beneficial in certain scenarios; however, you’ll benefit if you qualify. 

9 Stay informed of your company’s ongoing financial position 

Here is further good small business tax advice and an essential tax tip for UK contractors and small business owners. Once you’ve taken your salary and dividends, reimbursed expenses and paid any other bills, you’ll have a balance left in your company bank account(s).

Your company bank account balance should cover company taxes and any other bills. After considering all 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 on their online portal. 

10 Tax tips for contractors -make sure you don’t fall foul of the 24-month rule for travel expenses

Another of our key limited company tips is that you can claim your travel expenses to and from work and between other work sites. Indeed, that’ll help reduce the tax for contractors. However, another of our contractor’s tips is that you must be aware of the 24-month rule for contractors. This is one of the tax rules for contractors, and it states that as soon as you know you’ll 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 significantly affect your net income. The higher the cost of your travel expenses, the more influential the impact if this affects you. 

11 Small business tax advice (UK) -save tax when you hold your `annual event’  

Another way to save taxes for contractors is to claim up to £150 per employee for an `annual event’ or `events’ every year. 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 your tax write-offs for independent contractors, providing the amount doesn’t exceed £150 per employee. 

12 Tax tips for contractors -reduce tax when you claim trivial benefits 

This is one of the less well-known UK tax-saving tips for small business owners and contractors; however, it helps to reduce contractor limited company tax. Your company can pay you and your employees `trivial benefits every year. Indeed, this is another of the tax benefits of independent contractor status. However, individual amounts paid for trivial benefits mustn’t exceed £50, including VAT.

There is a total cap of £300 per annum for directors if the employer is a `close company’ (companies with less than five shareholders). Therefore, this includes an individual who’s 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 of the tax deductions for contractors in the UK is phone charges. Indeed, if you use your mobile phone for work reasons and there’s 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 the bills and account are in your company’s name.

14 Tax tips for contractors -claim for use of your home as an office

A top piece of small business tax advice for independent contractors is that the government increased the amount you can claim for working from home to £6 per week on 6 April 2020. This is another tax write-off for independent contractors, and you can claim for this, and perhaps more if you do lots 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 Consider a company pension scheme 

This is a tax-deductible expense if you make contributions through your business into a company pension scheme. You must set this up as an employer pension contribution because employee or personal contributions are treated differently in a tax context. As a result, it’ll save your company CT. This is another key tax benefit for independent contractors. Pension contributions through your company can extract further funds without paying 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. In addition to contractor tax advice, a good accountant can advise on other areas, such as when to pay Capital Gains Tax and potential Inheritance Tax issues. 

17 Tax tips for contractors -make tax savings with specific 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. An excellent way to protect yourself is to organise your contractor finances. When you purchase any financial products, the provider should be regulated by the Financial Conduct Authority.

Your contract will state which insurance you require for your work. This is likely to include Professional Indemnity insurance, but it could also include other contractor insurance. When you get contractor business insurance, you’ll receive a contractor discount through our website.

Relevant Life Insurance (RLI) is different from standard life insurance. If you take out RLI, it’s tax-deductible through your company. It is 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 with your own company, you can’t claim statutory sick pay if you cannot work due to illness. Therefore, contractor Income Protection will provide added peace of mind if you fall ill.

A valued partner of Contractor Advice UK is Broadbench. They are experts in contractor finances and offer both the above products. To date, they’ve helped many of the members and visitors of this contractor’s website. All our guides on financial type policies 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 considering how to reduce tax as a contractor, we don’t cover everything within these tips for small businesses and tax advice for independent contractors. On the other hand, we include many tax-saving ideas for UK limited company contractors. Finally, many of our tips above help to reduce your overall tax burden as a UK contractor or UK small business. However, looking at your overall tax position with your accountant would be best.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: First timer guide, Main Guides, Tax Saving Guides /

Share This Guide, Choose Your Platform!

Leave A Comment