Contractor tax

contractor tax is the amount of tax that a contractor pays on his or her returns. Tax rules bind everybody and so there is no secrete way of avoiding paying tax as a contractor. Having said that, it is always important to know that your tax payments depend on a number of things, including tax deductibles. There are various ways that you may work to ensure that you reduce your contractor tax. By working through your own limited company instead of a parent company, you get more opportunities to plan your tax since you can take your proceeds through a salary and dividends. In addition, you can reduce the amount of tax by adopting a Flat Rate VAT scheme.

Learn more about contractor tax


Understand the claims you are entitled to make


Many contractors end up paying more tax because they do not know what expenses they are entitled to claim at the end of the year. Your ability to claim your contractor costs will cause you to pay less tax. When you make such claims, you enjoy relief on the claimed amount since the claim is usually deducted from the amount of profits you record. What this means is that you will only be left with corporation tax to be paid on your annual incomes earned. Therefore, the higher your deductible expenses the lower your total contractor tax will be.


Business expenses may be defined as the cost incurred exclusively for the purpose of the operations of the business. Some of the costs that you may claim as a contractor include computer software, equipment, accountancy fees and business travel costs. If you are not clear about which expenses to claim you may contact a professional tax accountant to help you calculate and determine your entitlement.


Consider the Flat Rate VAT Scheme


Surveys have shown that a majority of contractors enjoy more benefits by using the Flate Rate VAT scheme instead of the ordinary VAT scheme. The purpose of the flat rate scheme was to help small and middle-sized businesses enjoy lower tax. What this schemes means is that you simply charge the standard VAT of 20 for the financial year 20152016 but pay back at a lower rate. The rate at which you pay back largely depends on your profession.


Ensure to Avoid Penalties


People who do not pay their tax bills on time are usually penalized and this is obviously going to increase your payment. By planning your tax payments in time, you will avoid penalties and pay save more money.


Avoid Working Under IRS35


IRS35 is a federal legislation that was established to deal with contractors who are victims of disguised employment and are looking to enjoy the enormous benefits that contractors do without having to take any amount of risk. If you are contractor who happens to be working within this regulation, you will not be able to enjoy the benefits that those who work outside or who are not caught by the same legislation. In other words, you will claim only a small range of expenses as a contractor, which in turn means relatively higher taxes.


Consider Taking a Pension


As a contractor, you need to know that nobody is planning for your pension out there since you are not an employee entitled to such benefits. Therefore, it is advisable to set aside a fraction of your profits towards your pension. Pension contributions are deductible from your pre-tax profits and this means you will have to enjoy huge tax reliefs on this amount.


By doing all of the above, you will begin to enjoy tax benefits and reduce your overall tax as a contractor. For more tips on how to reduce contractor tax, you can contact a tax specialist to help figure out your deductibles and help reduce your tax.