Tax Tips for small businesses and freelance contractors

  1. A limited company structure is usually the best way to legitimately and compliantly minimise your tax bill
  2. This is because you can take remuneration through an efficient mix of salary and dividends and claim a wide range of legitimate business expenses
  3. Make sure your individual contracts do not fall foul of IR35 legislation – your accountant should be able to advise you on this
  4. Taking advantage of the flat rate VAT scheme, in many circumstances, can also add benefit equal to several percentage points of your net invoiced value each year
  5. Splitting the ownership of your company with a non-earning spouse can reduce the tax you pay, perhaps keeping you out of the 40% tax-bracket altogether
  6. Make sure you claim all of the expenses possible against your tax bill – for example an allowance for using your home as your place of work, or a share of household bills
  7. Other claimable expenses include: business travel, professional subscriptions or training, insurance, accounting fees, protective clothing, mobile telephone costs, pensions, private medical insurance, IT equipment,
  8. internet and software, costs of advertising your services, printing, copying, postage, stationery and consumables… and more
  9. It is normally (though not always) more tax effective to purchase a car outside of your company and claim the business-related mileage back at the rate specified by HMRC
  10. Investing in a pension is one of the most tax-efficient decisions you can make and will reduce both your company and personal tax bill
  11. These days a pension can be used to do all sorts of things, such as buying property on which it can then receive tax-free rent… and a qualifying pension scheme can borrow up to 50% of its value to help fund such investments
  12. The marginal rate of tax on income above £100,000 is significant, due to the fact that you gradually lose your personal allowance between £100k and £150k. So, if you don’t need all of the money you earn through your company to live on, leave it in the company account – it will incur substantially less tax that way. It can be used to provide for periods between assignments and will attract less tax if/when you decide to close the company down
  13. Look at investing the first slice of any surplus funds in a tax-free ISA. Up to £11,500 can be invested tax-free each year (before the end of March) and your money is instantly available.
  14. Surplus funds in your company account can be invested in higher-interest bank accounts or bonds. Some of the best tax-free rates are available offshore and as long as these are disclosed and the relevant tax is paid when the funds are returned to the UK, this is completely legitimate

Take professional advice from a specialist accountant and/or financial adviser

Please note, tax is complicated and the correct action to take in any individual case will be affected by specific circumstances. The above does not therefore constitute professional advice, only general information and we advise all contractors to go through their specific circumstances with a professional adviser before making any decisions or structuring their affairs. We recommend that any decisions relating to pensions or investments should be made in conjunction with a qualified independent financial adviser.

Posted by John Hoskin