Following on from my last blog, on the pro’s and con’s of the lifestyle side of being self-employed, today I am going to go over the harder side of being a Contractor or Freelancer – money, wonga, mullah, cash. Many of the people who come to us want to realise their dreams of freelancing and contracting in their area of talent, but many also want to know – how can I take more money home with me at the end of the day?
As a specialist Contractor and Freelancer Accountant, one of our responsibilities is ensuring that our clients are operating in the most tax efficient manner – whilst also being compliant with HMRC, Companies House, and IR35 rules and regulations.
In the wise world of The Beatles, ‘Money don’t get everything it’s true, but what it don’t get I can’t use – now give me moooooneeey’ (I personally prefer when sing ‘I don’t care too much for money, money can’t buy me love’ – but each to their own.)
When clients come to us after being offered a contract position, they usually want to know – how much more money they will be taking home at the end of their working day? For people who are offered a contract with a day rate of over £150 – i.e. an annual income close to £40,000 – a Limited Company solution usually suits, and ensures they are trading in the most tax efficient way (worth noting here, that tax evasion is a whole different story, and is not big or clever).
The tax efficiencies lie in taking a carefully planned mix of Salary and Dividends. We do a Tax Planning Example for our clients at the start of each tax year, to ensure all sources of income are considered (they might have income from a rental property or interest from investments); from this they can make a decision on Salary and the Dividends.
Hold on – what is a Dividend? Any Limited Company which has profit in the company can choose to pay a dividend to the shareholders of the company – in our client’s case this is often themselves and their spouse or partner. It is a payment of ‘after tax profits’ to the shareholders. So once you have paid (or set aside) your company taxes and your business expenses, you are left with your ‘after tax profits’ and you can pay the shareholders’ dividends from this.
Your Limited Company, with profits up to £300 000, will pay Corporation Tax at 20%. Always ensure you claim Business Expenses through your Limited Company (when wholly and exclusively for the purpose of the business) such as equipment, accountancy services, and business mileage as this will decrease your corporation tax bill when treated correctly.
As a Limited Company director you will also be liable to pay personal tax on your salary and dividends; however National Insurance is only paid on the salary, not dividends. These amounts are declared on your Personal Tax Return by 31st of January each year (we calculate and submit this for all our clients).
All UK Citizens have a Personal Allowance (£8,105 in this tax year) under which they do not pay tax, any income above this is taxed as follows:
For salary the basic rate of 20% from £0-34 370; the higher rate of 40% from £34 371 to £150 000 and the additional rate of 50% applies when earning over £150 000.
Please remember that your personal tax is likely to be calculated on a combination of the above scenarios, and that you may have taxable benefits which reduce your Personal Allowance – another reason to talk to us about Tax Planning!
If you, or someone you know, are thinking of starting up as a contractor or freelancer with a Limited Company, its best you speak to one of our specialist Start Up business advisors to get speedy, expert advice and ensure you are making the right decision for you. You Count, We Count.
The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.
Rishi Sunak has proposed a number of changes to the way that Corporation Tax will be calculated and applied. Learn more.