It might seem everything easy and carefree for those working freelance or as contractors and that they have nothing to worry about taxes. Well, it’s nothing like that, they too have to pay and can save tax as well if planned accordingly.
It is true that Contractors/Freelancers have got the advantage of full control over their professional life, but with the erratic nature of their income, it becomes extremely vital for them to not only manage their finances properly but also take care of the accounting and taxation aspects to avoid any lapses in the future.
Effective and skilful tax planning options for contractors/freelancers
1. Work via Limited Company – Going limited is the first and foremost step to be taken by contractors and freelancers. With the help of qualified accountants from Limelight Accountancy, the formation of a limited company can be made hassle-free. Hiring such accountants will not only help in determining the best structure for your business but also providing all necessary background support. The main advantage of working via a limited company is that the post-tax earnings can be maximised as far as legally possible.
2. Open a separate business bank account – Whether working through a limited company or sole trader, it is good to keep a record of your business income and expenses separately. A dedicated current account for your business can help you to maintain income and expenditure sheet.
3. Get your Ltd. Company registered under the VAT Flat Rate Scheme – Any contractor or freelancer with an annual turnover of not more than £ 1,50,000 (excluding VAT) can take the benefit of this scheme. Under this scheme, only a fixed amount of VAT on your turnover (including VAT) has to be paid. These fixed rates are predetermined by HMRC depending upon the nature of your trade and profession. This scheme gives the contractors and freelancers a substantial saving opportunity because the fixed rate percentages are usually lower than the standard rates.
4. Opt for low salary-high dividend strategy – It is advisable for directors to take home a low salary and the remainder of the company’s profits as dividends because unlike salaried income, limited company dividends are taxed separately and are not subject to National Insurance Contributions (NICs).
5. Claim your costs – There are a wide variety of expenses like allowable expenses, capital allowances etc. that can be claimed if the expenses are incurred wholly and exclusively for business purposes. An accountant can help you with its bifurcations and details. Also, take care of the claims you make because any false claims for the expenses that you have not made can put you in jeopardy. It is advisable to hire an accountant who can guide you with all the applicable rules and regulations surrounding expenses.
6. Be complied with IR35 rules – IR35 was introduced by HMRC in the year 2000 to deal with the issues of disguised employment. If your working practices do not match with those in the stated in IR35 contract, your hard-earned initiative can get into trouble. Only the best professional can make you abide by the IR35 rules and keep you and your business away from IR35 suspect.
7. File your returns on time – All your data and VAT returns must be filed on time. Unnecessary delay in filing your returns may attract penalties from both HMRC and companies house. It is better to appoint a VAT professional from Limelight Accountancy whose cost-effective VAT compliance and planning services can keep your VAT affairs in order and relieve you from any sort of burden.
8. De-registration benefits – Contractors or freelancers who are willing to sell or give away their start-up business for any reason can claim an entrepreneur’s relief (ER). Contractors and freelancers can gain tax relief at a reduced rate of 10%. The professionals from Limelight Accountancy can help you with the de-registration profits and extract maximum possible benefits for the contractors and freelancers. The rules related to Entrepreneur’s relief are complicated and it is advisable to use a specialist.
If you would like to have further assistance for the efficient and smooth working of your start-up, please get in touch with us for more details.