Maximise your tax efficiency: expert tips for contractors, freelancers, consultants and small businesses
Nobody likes paying more tax than necessary, right? Accrue Accounting know smart tax strategies can save you serious money. Whether you’re a contractor, freelancer, consultant, or small business owner, cutting down your tax bill (legitimately!) is easier than you think.
As individuals and business owners, we’re swimming in a sea of tax rates, thresholds, and rules. Having a solid grasp of the tax basics can save you from overfeeding HMRC unnecessarily.
A quick word of caution: Tax stuff can get pretty hairy. Always loop in a professional accountant before diving into any tax planning.
Understanding the tax basics
As a business owner, navigating the tax landscape can be overwhelming with various rates, thresholds, and rules to consider. By getting a firm handle on these basics, you can avoid overpaying HMRC.
Here’s a breakdown of the key taxes you need to know:
Income Tax
You know that chunk of your salary that disappears into the tax void? That’s income tax. Depending on your earnings, you’ll get slapped with rates ranging from 20% to 45%. Ouch!
National Insurance
Another slice of your paycheck goes to National Insurance. It’s a tad trickier to calculate, but it’s basically another tax on your income. Employees and employers both chip in, helping fund goodies like NHS services and pensions.
VAT (Value Added Tax)
If your business rakes in £90k or more a year, you need to register for VAT. That means adding a little extra to your invoices – 20% extra, to be precise. But hey, you can also claw back some VAT on your business purchases, so it’s not all bad. For more assistance, please check our VAT calculator here.
Corporation Tax
Got a limited company? Then you’re on the hook for Corporation Tax. It’s a percentage of your profits that you pay annually. The rate is currently 19%, but it jumps up once your profits hit £50k building up to 25% on profits over £250k.
Top tax-saving strategies for contractors and freelancers
Want to lower your tax burden like a pro? Here are some tried-and-tested methods to make sure you’re as tax-efficient as possible:
Expense everything you can:
Track every allowable expense and claim all business expenses – from travel and tech equipment to meals and accommodation. These deductions can significantly reduce your taxable income. Ensure you keep detailed records for all your claims.
Pay yourself up to your personal allowance:
Take advantage of your tax-free Personal Allowance (currently £12,570) before drawing any additional salary. You will need to pay national insurance on earnings above £9,100, but keeping your salary within this band keeps your tax bill minimal.
Divvy up those dividends:
When it’s time to withdraw, dividends are your friend. They come after Corporation Tax, but they’re still a sweet, tax-efficient option. Opt for dividends over a salary paycheck to save on taxes. Trust us, your wallet will thank you.
Pro tip: If you’re married or have a civil partner, you can distribute dividends to maximise both of your tax-free allowances. Please check our dividend tax calculator.
Max out pension contributions:
Use business cash and contribute into a pension scheme and watch your tax bill shrink. It’s like magic, but better. Pension contributions are a smart way to reduce your tax liability. By contributing through your business, you’ll not only save on taxes but also build a solid financial foundation for your future.
Tip: Consult with an independent financial advisor to set up the most tax-efficient pension scheme for your situation.
Home office perks:
If your work mainly happens at your client’s place, but you use your home office now and then for business stuff, you can claim a little somethin’ somethin’ for those incidental home expenses – think £6 a week or £26 a month, adding up to a tidy £312 a year.
To make sure you don’t miss out on this sweet deal, set up a regular payment from your company account. Easy peasy! Then, just mark it as paid and voila – money saved.
No need to keep records of these expenses, so you can focus on the important stuff – like growing your business
We can help with a more detailed calculation if £6 a week doesn’t cover it!
VAT working for you?
Keep an eye on your VAT setup. Tweaking your VAT method can save you some serious dough. For instance, think about whether switching from the flat rate VAT to the standard or cash accounting scheme – or maybe the other way around – would be a better fit for you.
IR35 dance:
Getting to grips with IR35 and steering clear of its grasp is a smart move for keeping your tax bill in check. Navigate IR35 like a pro to keep your tax burden low. It’s all about understanding the rules and snagging contracts that play nice.
Explore employee benefits:
Want to treat yourself or your team? Think health insurance, gym memberships – even a swanky company car. Just beware: the tax rules here can get murky, so chat with your accountant first.
Phew, that’s a lot to digest! But fear not, with a little expert advice from Accrue Accounting, you’ll be a tax-saving ninja in no time.
