There are no hidden secrets to paying less tax. HMRC’s rules are clearly set out, and they take tax evasion very seriously. However, there are ways that contractors can legally and effectively minimise the amount of tax they pay on their earnings at the end of the year.
Work through your own limited company
The main benefit of this is that you have greater control over your income, and therefore your tax. You can plan your salary and dividends, minimising the income and national insurance you pay. These may include accommodation, travel, training, and equipment. This is true for contractors who fall outside of IR35. For those inside, the rules are somewhat different, and you will pay tax through PAYE, often resulting in you taking home less salary and paying more tax.
Know what expenses you can claim
You can claim tax relief on your expenses that are incurred solely and exclusively for business purposes as long as you fall outside IR35. When you claim an expense, the cost of this is subtracted from your profits, which is then subject to corporation tax. The more expenses you reclaim, the lower the value of your profits, and so the less corporation tax you will be required to pay. If you are inside IR35 and work in the private sector, you can claim a 5% expenses allowance to cover the cost of operating your business. However, if you work in the public sector, this reclaim is not available to you.
Flat Rate VAT Scheme
A lot of contractors choose to use the Flat Rate VATScheme instead of the standard VAT scheme. It simplifies the VAT process for smaller businesses and means that you charge a VAT rate of 20% but pay HMRC back at a lower rate. This payback rate depends on your profession.
Try your best to remain outside of IR35
IR35 is designed to highlight contractors who take advantage of self-employment benefits while serving as employees. Falling within IR35 ultimately means you pay a lot more tax through the PAYE system, have a reduced ability to control your salary and dividends, and have a limited ability to reclaim expenses. You are treated as an employee rather than a contractor.
Hire an accountant
If you fail to pay your taxes on time, you might have to pay the penalty. Be organised, use accounting software to manage your finances accurately, or hire a reputable accountant. You may think that hiring an accountant will cost you, rather than save you money, but they can save you time, money, and the stress that comes with filing your tax return. They also know the best ways for you to save on taxes and can provide you with expert advice for your savings. If you follow these steps and put money aside to be able to pay your way at the end of the tax year, you will be sure to avoid any penalties and save money on your taxes.