No one wants to pay more tax than they have to, and this is particularly true of the self-employed. If you’re a contractor, how can you pay less tax? HMRC rules apply to everyone, but careful planning can minimise your tax liability. The following are some examples of how you might be able to reduce your tax bill.

Track your expenses effectively

Contractors can claim business costs as expenses, meaning that tax relief will be due on the total. When expenses are claimed, this cost is deducted from profit. For tax purposes, a business expense is any cost that is incurred purely because of running a business. For example, business expenses could include office equipment, business travel, tools, computers and accountancy fees. Make sure you keep clear records of all expenditure.

Know your IR35 status

Contractors who operate outside IR35 are entitled to more tax benefits than those working inside IR35. The latter can claim a more limited range of business expenses. To find out more about your IR35 status, it’s best to consult a qualified expert.

Set up a limited company

Using a limited company leads to additional tax planning opportunities, because you can combine your income as salary and dividends. Operating as a limited company also has benefits for the Flat Rate VAT scheme and National Insurance. To find out more about working as a limited company director, ask your accountant.

Sign up for Flat Rate VAT

Most contractors will save money by using the Flat Rate VAT Scheme. It was introduced to simplify VAT for small businesses. In brief, contractors charge the standard rate of VAT, but pay HMRC a reduced rate, which is determined by your profession.

Save for your pension

Even without the tax benefits, it is recommended that you pay some of your company’s profits towards a pension. Pension contributions will be deducted from profits before tax; thus contractors who pay into a pension will get tax relief on the cost of those contributions.

Stay up to date

Government tax schemes and initiatives are constantly changing, which means that new rules could come into force that will save you money. As a working example, Employment Allowance means that limited companies can reduce what they pay in employer National Insurance contributions by up to £2,000. If your total employer’s National Insurance bill is less than £2,000 per year, you will not be liable for any employer’s National Insurance contributions. This usually applies to contractors.

Avoid HMRC penalties

Paying your tax bill late could lead to a penalty, and this may increase over time. Setting aside money for tax bills means you can avoid this.

Use an accountant

Using an accountant may be seen as an additional expense, but an experienced accountant can save you money, as well as time. Your accountant can clarify all relevant taxation issues and provide valuable tax-saving advice. If you’re looking for a qualified business accountant in South Yorkshire, why not get in touch with us here at Adaptive Accountancy? We can help to ensure you are taking advantage of every possible available tax efficiency.