Why Self-Employed Contractors Could be Paying More Tax Than Necessary

Self-employed

With the self-assessment deadline behind us and the end of the tax year just weeks away, it’s time to make sure you’ve implemented all your tax planning for tax year 2018/19. Maybe you’re wondering if there’s anything you could do to reduce your liability or maybe you just want to check that you haven’t missed anything. In either case, here are some common reasons why self-employed contractors like you might pay more tax than necessary.

A Contractor's Guide to Year-End Tax Planning: click here to download>>

You’re not saving for the future

Pensions are one of the most tax efficient ways to save, and they have some real advantages, aside from the obvious one of saving for your retirement. Personal pension contributions attract basic rate tax relief at the point of payment, and higher rate tax payers can extend their basic rate band by the value of their contributions.

Returns within the pension are tax free, and on retirement up to 25% of your pension pot can be released tax free.

You don’t donate to charity

Donating to charity is good for you, it’s good for the causes you support and it makes the world a better place. Your generosity could get you more than the warm glow of helping a worthy cause, as charitable donations can reduce your tax liability.

Donations by individuals to charity are tax free. This is called tax relief.

The tax goes to you or the charity. How this works depends on whether you donate:

Gift Aid

Donating through Gift Aid means charities can claim an extra 25p for every £1 you give. It won’t cost you any extra.

You need to make a Gift Aid declaration for the charity to claim. You usually do this by filling in a form. You must give a declaration to each charity you want to donate to through Gift Aid.

Paying enough tax to qualify for Gift Aid

Your donations will qualify as long as they’re not more than 4 times what you have paid in tax in that tax year (6 April to 5 April).

The tax could have been paid on income or capital gains.

You must tell the charities you support if you stop paying enough tax.

Higher rate taxpayers

If you pay tax at the higher or additional rate, you can claim the difference between the rate you pay and basic rate on your donation.  Do this either:

You haven’t claimed your expenses

When it comes to your tax liability, every little really does help. It may seem like a lot of trouble to keep track of all your travel and subsistence costs, but over the course of a year they can add up to a significant amount. The same applies for business entertaining costs and business phone calls. You might also be able to claim for professional fees or childcare costs. If you’re not in the habit of tracking and claiming your business expenses, or if you think you might be missing something that you could claim, talk over your circumstances with your accountant as soon as you can.

You’re not with Orange Genie Accountancy

We’ve mentioned already that a specialist contractor accountant could make a difference to your contracting business, but all contractor accountants are not created equal. It’s difficult to overstate the value of working with your own dedicated accountant, who knows about your business and genuinely wants you to succeed. Having Orange Genie Accountancy on your side is a great way to make sure you’re operating as efficiently as possible.

You Haven’t Considered Going Limited

In an article about tax efficiency, we really have to mention the limited company option. As a self-employed sole trader your tax position is extremely simple – your profits count as personal income and you pay tax accordingly.

By contrast, as the director and share-holder of your own limited company you have a number of options and a great deal of flexibility, which allows you to plan your tax position to make the most of your circumstances.

If you’re working as a self-employed contractor, the chances are you already engage an accountant to help with your self-assessment tax return. We strongly suggest you take that one stage further and speak to a specialist contractor accountant about trading through your own limited company. If you choose the right one, you might be surprised at how little additional work you’ll have to do.

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

 

 

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