On the hunt for some accountancy advice and tax tips as a self employed contractor or freelancer? Clear Books accounting partner, Tony Dhanjal from Aidhan Accountancy (www.aidhanfinancial.com), gives us a run down on the top 10 tax planning tips.
**Updated on 19th November 2015**
1. Set up as a Ltd Co
It sounds immediately obvious but this is the first step any contractor/freelancer should take if they want to maximise their disposable income as far as legally possible. A Ltd Co. is a separate trading entity from an individual and is governed by the Companies Act 2006. So, although there is additional responsibility and administrative requirements, the typical contractor/freelancer should be able to save around 20 – 30p in the £ of tax when compared to PAYE, umbrella co or being self employed. (click here to learn more)
2. Register your Ltd Co. on the flat rate scheme of VAT
This is a potential winner for contractors/freelancers and is easier to administer. In some circumstances it can even save you tax! On the flat rate scheme you pay a fixed amount of VAT based on your turnover (including VAT). The fixed rate depends upon your profession/trade and is pre-determined by HMRC. You can only join this scheme if your turnover is expected to be lower than £150,000 (excluding VAT) over a 12 month period. (click here to learn more)
3. Pay yourself a minimal (director) salary
As at 2015/16, this amount is £10,600 which equates to £883.33 per month. This is the level of an individual’s personal allowance for income tax. The Employee NIC free allowance is £8,060 and is payable at 12% for any salary amount between £8,060 and £42,380 and 2% on any amounts thereafter. Use this salary calculator to explore taxes paid.
4. Claim your full suite of eligible expenses
There are a suite of expenses contractors/freelancers can claim that they do not realise. Expenses through your Ltd Co. attracts corporation tax relief at 20% (small business rate). However, there are strict rules on expenses and carelessness or ignorance does not bode well with the tax authorities. (click here to learn more)
5. Time your dividend extractions correctly
Dividends are a key tool for contractors/freelancers wishing to extract money out of their Ltd Co’s as drawings. Timing your dividend extraction can be a useful tactic in saving tax. In 2015/16 a contractor/freelancer has up to £28,606 (net) dividends (per shareholder) they can extract without incurring additional personal tax assuming they are also taking the full minimum director salary and have no other sources of personal income from elsewhere. Any amounts above this will incur an additional dividend tax of 32.5% (effective rate is 25% after the notional tax credit of 10%) and 42.5% (effective rate of 30.61% after the notional tax credit of 10%) for any amounts above £150,000. (click here to learn more)
6. Claim the £2,000 Employers National Insurance Allowance
Contractors & freelancers are subject to Class 1 “Employers” national insurance payable by their Ltd Company. Employer’s national insurance is levied at a rate of 13.8% on director and employee salary amounts over £8,112 per annum and up to £42,385 p/a. However, the employment allowance absorbs the first £2,000 of employer’s national insurance liability and means you would have to earn a director salary in excess of £22,600 before your Ltd Company starts paying any employers national insurance.
7. Claim the AIA on capital assets
If you buy a capital asset (items such as laptops, hardware, fixture and furniture for your office), you can claim what is known as a first year capital allowance. The first year capital allowance is like an accelerated depreciation charge that provides tax relief in the year of purchase. In 2015/16, the first year allowance is a very generous £500,000 although this allowance does tend to be changed in the Budget every year!
8. Ensure you comply with IR35 rules
IR35 is a piece of tax legislation that assesses contractors/freelancers based on the substance of their working arrangements. Being caught inside of IR35 can defeat the object of running your contractor/freelancer business through a Ltd Co. IR35 is assessed on a contract by contract basis.
9. Submit your data and files on time
You must always submit your data and VAT returns on time, you can use Clear Books accounting software to do this. If you continuously submit your data or returns late you will get hit with unnecessary fines from both HMRC and Companies House. As with anything, the GIGO principle applies – Garbage In, Garbage Out. If you provide your accountant, the tax office or Companies House with incomplete, incorrect or no data, then you will only get back what you put in. We are all only as good as the data/information we receive!!
10. Entrepreneur’s relief
This is available to contractors/freelancers who are selling/closing down their Ltd Co’s. Once all other tax-efficient means have been utilised (director salary & dividends), entrepreneurs relief can be applied to any remaining funds in the company taxed at only 10%. However, this is subject to a whole host of criteria being satisfied and is subject to a £25,000 limit for personal services companies.
If you would like further advice or a free initial consultation with Aidhan Accountancy, please follow this link:
http://www.aidhanfinancial.com/Accountancy/face_to_face_consultation.php or call them on 0203 368 3173.