How a Contractor Can Save Tax and Avoid IR35
Many Self-Employed people wanting to save tax work in the IT, Banking, Accountancy, Engineering, Project Management, Oil, Sports, Media, Dental or Medical Sectors as contractors or consultants. They do this to save tax. How does this work?
Well they normally get a contract role through agencies who setup a contract for services with the Client. The client signs the timesheet and the agency pays the contractor. Some contractors work directly for the client. The advantage of this is a higher rate, though they will have to wait longer to get paid normally, and there is the risk of non payment of course. At least with an agency a contractor knows they will get paid paid on time. Though I have heard from other contractors of some agencies who didn’t pay, though these seem few and far between.
The contractor normally works through a limited company paying himself a salary and dividends to apparently save tax. The problem with running a limited company is the amount of paperwork that is required in terms of vat returns, minutes, tax forms etc. There are also a lot of expenses to be paid for such an accountant, though there are many items that can be tax deductible like business business travel, telephone, stationery and insurance.
The problem with running a limited company as a consultant is that because of the expenses there is only a certain amount of money you can take out as dividend, as a limited company is not allowed to have a negative balance sheet. You also pay many different types of taxes, Income Tax, employers and employers national insurance at 10.4% (last time I looked). Plus there is corporation tax to pay. In fact running a limited company may mean paying more tax than an individual. So whereas a self employed person initially set out to save tax, he is in fact paying more tax, and drowning in paperwork. The other risk is that HMRC think they should be liable for IR 35, where HMRC tax them as employees without the protection and benefits of being employed. Suddenly running a limited company does not seem like such a good idea.
How To avoid IR35
- When signing an agency contract (for a limited company) use the opt-out clause
- Make sure you agree with the client your physical working relationship is NOT one of employee/employer. Have a "Working Arrangements Confirmation" with the client.
- Right of substitution with another - this is indication of self-employment
- Control-if relationship is one of master and servant then this is an indication of employment
- Notice-if self-employed this is when the work finishes. If employed based on a notice period
- Financial Risk- deemed self-employed if work for a fixed fee rather than hourly rate
- Provides own equipment - deemed self-employed if provides his own equipment to do his work
- Consider using an umbrella company as an employee to avoid IR35
So How can a Contractor Maximise His Income and Pay less Tax?
One alternative option to reduce tax and national insurance is to use an umbrella company to channel earnings through. Once an agency has found a client for you, the agency can then setup a contract with the umbrella company. The umbrella company then sets up a contract of employment with you as an employee of the Umbrella company.
The advantage of this is there is no more worries about running a limited company. No more worries or sleepless nights about IR35 or S660a, as you are now an employee. Best of all you will be making more of your money. This is a good way for contractors to manage their tax affairs efficiently, regardless of whether you work in the IT, Engineering, Medical, Dental, Media or Oil sectors.
For more information on how to save tax and take home more pay click on the link below
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