Understand your IR35 status
Deciding whether you are a contractor under the IR35 rules or whether you are, in fact, an employee is really important when it comes to working out how much tax you will pay. Contractor status will enable you to pay less tax than Employee status because as a self-employed person you get little or no job security and fewer benefits such as paid holidays, sick pay and maternity/paternity pay.
Ensuring you are IR35 compliant will be to your benefit as HMRC take a very dim view of non-compliance. If they suspect you are not complying with the rules, they can launch a complex investigation and are even entitled to ask for 100% of unpaid taxes. They will also be able to charge interest as well as the 100% unpaid taxes.
Some of the areas you might want to consider when making this decision are:Control over your work
- if you can choose where you carry out your work, the hours or days you work and the method of working, you would be classed as a Contractor. If you were working regular hours every week in one of the company’s locations, you would be classed as an Employee.Can you be substituted?
- If you cannot carry out your work as promised, do you have the facility to bring someone else in on your behalf? If you are the only person who is able to do that work, you would be classed as an Employee.Are you officially one of the team?
- If you are recognised by the general public in this way, for example by having a photo and biography on the company’s website, then you would be classed as an Employee.
Have a Pension Plan.
You need to consider planning for your own retirement by transferring some of your profits into a pension fund. You can claim tax relief on money paid into a pension fund from your income. There could be significant tax benefits for you as well as other advantages. Contractors can start to draw down from their pension fund from the age of 55 and can take out more than one lump sum if they wish.
Are you eligible for tax credits?
There are a range of benefits to operating as a self-employed Contractor, but one of the disadvantages is the susceptibility of your income to changing circumstances.
HMRC have a way of assisting in these circumstances by way of Tax Credits which is a means-tested benefit. A contractor could qualify for working tax credit if they are working a minimum of 16 hours weekly, As far as HMRC is concerned, working can include looking for a new contract, going to networking events, and keeping your bookkeeping and administration up to date.
However, the formula used by HMRC to assess whether you would be eligible is quite complex using a sliding scale which involves factors such as how many children you have and your household income, but you can ask them for assistance in working out whether you would qualify.
Useful HMRC website links include a general overview of tax credits:Gov.uk - Tax Credit Enquiries
and guides with examples of such calculations:Gov.uk - Child Tax Credit and Working Tax Credit LeafletGov.uk - Tax Credits Calculator
Make sure you claim all expenses.
Contractors can claim business costs as part of their expenses for tax relief. The amount is deducted from profits so the more business expenses you can claim, the less you will pay on taxable profits. Anything you have paid for which is totally for business purposes can be claimed, so it’s worth checking out the full list of allowable expenditure. Examples are IT administration fees, travelling for business and even your accountant’s fees.