The most common question we’re asked by the contractors we work with is a simple one: “how can I increase my take-home pay?” Fortunately, our team of contractor and small business accountants specialise in helping people compliantly take as much of their income home as they can. These five top tips will help you do the same.
Take advantage of your personal tax allowance
The first and simplest step we advise is to take full advantage of your personal tax allowance. If you operate via your own limited company you can do this by taking a small monthly salary and drawing most of your income in the form of dividend pay-outs from your company.
We advise this for three main reasons:
Limited company dividends are taxed separately to standard income and are not subject to National Insurance Contributions. By drawing down most of your income in this form, you are reducing the amount of National Insurance you pay while still ensuring you’re entitled to a full state pension upon retirement.
Of course, sometimes this isn’t feasible for your circumstances and or, in some cases, may be less tax efficient, making getting expert advice vital. The last thing you want is to be paying thousands of pounds more in tax after attempting to minimise it.
Claim the expenses you’re entitled to
Another simple way of reducing your tax bill at the end of each year and maximising your take-home pay is claiming for every expense possible. We have previously written a full article detailing all expenses you can claim as a limited company but, alongside obvious expenses such as travelling and salaries, you can also claim for outgoings such as:
And many more outgoings.
By ensuring you keep accurate records of all expenses and claiming appropriately, you will reduce business profits. This reduces the amount of Corporation Tax you are liable to pay which, in turn, increases the amount you are able to withdraw from your business each year.
Click the link above to read our previous article and discover everything you are able to claim for.
Know what you’re worth
Although this may seem an obvious step, it’s important that you’re always charging what you’re worth.
Many contractors set their rates to fair levels in the beginning but, due to getting caught up in running their business, fail to keep on top of what other contractors in their industry are charging. This often leads to money being left on the table during negotiations.
At least once a year you should take the time to review the landscape of your industry to establish current supply and demand of contractors in your industry and discover what your competitors are charging. Failing to do so and keeping your rates at the same level may mean you’re undercharging for your services and missing out on a significant income increase.
Know your personal tax position
Many first-time contractors get caught up in the day-to-day activities of working, finding work and networking, meaning they forget about simple things such as their personal tax position. If you’re forecasted to have earnings over that of the higher rate tax threshold plans should be put into place to minimise the impact this will have on your earnings.
There are a number of things you can do to reduce this impact, such as introducing a second shareholder or making pension contributions. Acting quickly and putting plans into motion is vital if you are to avoid paying more tax than necessary.
Remain compliant with legislation
Remaining compliant with legislation such as IR35 is a vital part of being a contractor and ensuring your take-home pay is maximised. Failing to remain compliant can result in significant fines, dramatically reducing your take-home pay.
Of course, the main objective of any contractor is to work outside IR35 whenever possible, but if you are not able to do that it’s important to know your position and ensure you’re acting appropriately. The last thing you want to do is ignore this and become the next Dragon Fly case.
Knowing your IR35 position can be complex, but specialist contractor accountants will be able to provide you with the advice you need to remain fully complaint with this and all other relevant legislation.
Hire Exchequer Accountancy
Of course, you could always let our team of specialist small business accountants worry about all this so you can focus on running your business.
Call our team today on 033 3323 1199 or email us to find out more.