Just starting contracting for the first time after years considering it and here’s what I’ve gleaned now I'm in at the deep end on my notice period from my permie job. Is there anything I’ve missed / misunderstood / should rethink. I’ve also some questions…
I already have a Ltd company (from another venture) so it was a no brainer. This is also appears the most tax efficient and “safe” i.e. “not aggressive” way of controlling the tax you pay. Note: 2 years ago I worked at HMRC on a new data warehousing project so know how they can identify dodgy companies and directors! So I won‘t risk these “special schemes that get you more than 80% of you fee!”
I’m assuming I’ll be caught by IR35 until I can satisfy myself I’m not caught by my working practises (not the contract wording).
To avoid paying tax at 40% too early I should pay myself a lower salary for a start – just in case I don’t get that second contract straight away. This also gives me “bench” time if necessary so my income is smoother. I will however have to pay any outstanding Tax/NI by April 19th!!! How quick!?
I should get childcare vouchers instead of my wife – £55/wk. This will save me an extra 12.8% Employers NI and is circa £1000 extra I can take from the company tax free.
Get my pension contributions out. A nice big chuck – in fact as much as possible –ideally to keep my tax below 40% but balancing as I want some capital to invest in my main business – see IR35 later. I can then not put any in later years when I plan to be running a “proper” business and sit watching my returns compound.
Keep a log and claim all my mileages, toll charges and parking.
Keep receipts for any "real" lunches. Likewise accomodation.
I can claim for a new business laptop but it will not be an extra expense – just something which counts to my 5% (unless I can get out of IR35).
Training has me baffled – can I or can’t I claim say for an Oracle PL/SQL course – if I’m using Oracle at my client site and don’t currently have the skills (well I do sort of, but I’m not certified)? Within IR35 – is it just one of my 5% allowance expenses – or does this mean I can claim it outside the 5% as an extra “cost required to do business”? I have a feeling the answer will be the wrong one! Na Nah :-(
Register for flat rate VAT and make a little bit by not spending as much on business equipment/costs – but this will then be taxed an NI paid. Blood starting to boil now so….
Finally – that IR35 is an unfair morally corrupt tax practise. I can see the reason it was bought in – to stop people avoiding tax / ni on dividend payments which is really income and I agree with that. But, I wanted to not earn income – basically keep my income the same as before I started contracting to build up cash to promote the business I’d originally started the Ltd Co for. Now I find that regardless of my company’s prior existence, each contract assignment HAS to be treated as earned income and the relevant tax and NI paid – even if I don’t actually take the salary. So basically although I’m trying to run a business with high risk and marginal returns in some areas, my bread and butter coming from contracting can’t be treated as company income not personal income. That’s absolutely staggering – and really caught me out! Anyone aware of anyone successfully been able to argue this point and not “earn” the money?
Its such double standards. Do, for example energy companies get told they can keep the money in reserves for any “deregulated supply” income (=competitive and more risky business), but all their distribution networks (=safe monopoly) income must be paid out to shareholders and taxed. No thought not. Do big IT companies have to pay all the fees their in house consultants get when working on a client project as salary to the employee, in for example a case where their key employee can’t be substituted? No, thought not! So why do the little guys have to suffer this forced salary regime?
Thankfully I took a contract close to home – otherwise I’d have been better off as a permie if I had high travel and accommodation expenses. I’m tempted to start staying in hotels and getting a mistress just so I can get screwed, partially at the expense of the government (instead of by them at my own expense)!
Simon.
I already have a Ltd company (from another venture) so it was a no brainer. This is also appears the most tax efficient and “safe” i.e. “not aggressive” way of controlling the tax you pay. Note: 2 years ago I worked at HMRC on a new data warehousing project so know how they can identify dodgy companies and directors! So I won‘t risk these “special schemes that get you more than 80% of you fee!”
I’m assuming I’ll be caught by IR35 until I can satisfy myself I’m not caught by my working practises (not the contract wording).
To avoid paying tax at 40% too early I should pay myself a lower salary for a start – just in case I don’t get that second contract straight away. This also gives me “bench” time if necessary so my income is smoother. I will however have to pay any outstanding Tax/NI by April 19th!!! How quick!?
I should get childcare vouchers instead of my wife – £55/wk. This will save me an extra 12.8% Employers NI and is circa £1000 extra I can take from the company tax free.
Get my pension contributions out. A nice big chuck – in fact as much as possible –ideally to keep my tax below 40% but balancing as I want some capital to invest in my main business – see IR35 later. I can then not put any in later years when I plan to be running a “proper” business and sit watching my returns compound.
Keep a log and claim all my mileages, toll charges and parking.
Keep receipts for any "real" lunches. Likewise accomodation.
I can claim for a new business laptop but it will not be an extra expense – just something which counts to my 5% (unless I can get out of IR35).
Training has me baffled – can I or can’t I claim say for an Oracle PL/SQL course – if I’m using Oracle at my client site and don’t currently have the skills (well I do sort of, but I’m not certified)? Within IR35 – is it just one of my 5% allowance expenses – or does this mean I can claim it outside the 5% as an extra “cost required to do business”? I have a feeling the answer will be the wrong one! Na Nah :-(
Register for flat rate VAT and make a little bit by not spending as much on business equipment/costs – but this will then be taxed an NI paid. Blood starting to boil now so….
Finally – that IR35 is an unfair morally corrupt tax practise. I can see the reason it was bought in – to stop people avoiding tax / ni on dividend payments which is really income and I agree with that. But, I wanted to not earn income – basically keep my income the same as before I started contracting to build up cash to promote the business I’d originally started the Ltd Co for. Now I find that regardless of my company’s prior existence, each contract assignment HAS to be treated as earned income and the relevant tax and NI paid – even if I don’t actually take the salary. So basically although I’m trying to run a business with high risk and marginal returns in some areas, my bread and butter coming from contracting can’t be treated as company income not personal income. That’s absolutely staggering – and really caught me out! Anyone aware of anyone successfully been able to argue this point and not “earn” the money?
Its such double standards. Do, for example energy companies get told they can keep the money in reserves for any “deregulated supply” income (=competitive and more risky business), but all their distribution networks (=safe monopoly) income must be paid out to shareholders and taxed. No thought not. Do big IT companies have to pay all the fees their in house consultants get when working on a client project as salary to the employee, in for example a case where their key employee can’t be substituted? No, thought not! So why do the little guys have to suffer this forced salary regime?
Thankfully I took a contract close to home – otherwise I’d have been better off as a permie if I had high travel and accommodation expenses. I’m tempted to start staying in hotels and getting a mistress just so I can get screwed, partially at the expense of the government (instead of by them at my own expense)!
Simon.
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