Tips for Lowering Your Tech Contracting Tax Bill

With the new tax year right around the corner, current tech contractors (and those considering joining the ranks of the self-employed) may want to review a number of recent tax changes, as well as strategies that can lower your tax bill.

Depending on your situation, some of the changes may benefit you, while others could cut into the amount of money you get to bring home. Regardless, you certainly want to take full advantage of the deductions and write-offs that are available to you.

Here’s a brief overview of the tax changes that will impact contract professionals, and some perfectly legal ways to reduce your tax bill. 

Overview of Tax Changes

Are you still self-employed? If you worked through a limited company for a public-sector client after April 6 2017, you may have been reclassified as an employee due to the enactment of IR35.

“Some public-sector entities made blanket decisions to reclassify their contractors,” explained Dan Mepham, partner with SG Accounting.

If your employment status changed, you must pay the full amount of tax and NICs from all income payments you receive from the business, Mepham added. He also suggested some strategies to help minimize the tax bite: “You can charge public clients a higher rate to cover the difference in costs, argue for an exception to the rules by showing that you truly are self-employed or work for private sector clients instead.”

An accountant can look beyond the terms stated in the contract to see if your work duties and practices qualify for an exception to the IR35 employment rules, advised Emily Coltman, FCA, chief accountant for FreeAgent, a provider of accounting software for freelancers and small businesses.

He or she can also run the numbers to see if it’s more advantageous to operate as a sole trader, a limited company, or to work through an agency as an employee.

The Flat Rate Scheme for limited cost traders also changed in 2017. Simply put, some IT contractors have managed to eke out a small profit by using the simplified Flat Rate Scheme. Before you get used to having the extra cash in your pocket, note that many contractors will now need to calculate value-added tax (or VAT) at 16.5 percent instead of 14.5 percent.

If you’re not sure what to do, the government provides a calculator to help you assess whether it’s more beneficial to stay or leave the Scheme.

One more bit of bad news: Beginning April 6, 2018, the tax-free dividend allowance will fall from £5,000 to £2,000. This could have a significant impact on limited company contractors, since the current rates of dividend tax for 2017 and 2018 are 7.5 percent, 32.5 percent and 38.1 percent.

Fortunately, there’s also some good news for contractors. For instance, you may be able to offset some of the tax increases, since the income tax personal allowance will increase from £11,500 to £11,850 for basic-rate taxpayers in April. Plus, the corporate tax rate has steadily declined since 2012.

Other Strategies for Reducing Your Tax Bill

Reducing the amount of money subject to personal and corporate taxation is the best way to slash your tax bill. How? “Invoice less and spend more,” Mepham summated.

Specifically, reduce taxable income by paying as many allowable expenses as possible from the business rather than drawing a higher salary to pay bills.

Some examples of costs that can be claimed as business expenses include mobile phones, computer equipment and software, business travel and accountancy/invoicing fees. You can also claim continuing professional education costs, home office expenses, and even the annual cost of an eye exam.

“If you’re a sole trader and you use any part of your home for work as well as non-work related activities, you can claim a proportion of some costs of running your home, such as council tax, heating, lighting, phone bills and Internet services,” Coltman said.

In addition, you can pay childcare costs directly from your limited company; or deduct the cost of marketing or promoting your small business (such as advertisements, websites, networking club memberships and directory listings).

Party of one? No problem. As the director of a limited company, you can deduct some entertainment costs, such as the tab for a holiday party or a limited amount of trivial benefits (including store vouchers) that can be used to pay for goods and services.

Another way to help reduce your current tax bill, and proactively prepare for retirement at the same time, is by apportioning some of your company’s profits towards a pension plan. Pension contributions are deducted from your company’s profits pre-tax. Here’s a more complete list of deductible expenses to help you keep more money in your pocket.

Finally, if you don’t pay your tax bill on time, you could face penalties. The penalties can be substantial, even if you accidentally underpay or commit careless errors. It is better to be organized and to hire an accountant than to pay unnecessary taxes.

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