That jump from a permanent job to full-time contracting is a chance to double your earnings, increase autonomy, and bail out of office politics. Having taken the leap into contracting, surely, your objective should be to protect your hard-earned cash by working in a tax-efficient way. Without a doubt, the most tax efficient way to run a contracting business is to do so through a limited company. However, for some people setting up and running their own company is a daunting prospect. Of the 1.3 million UK limited companies, around 550,000 are run by sole directors, and a fair proportion of these companies provide contracting services to clients. An important consideration for any contractor is to ensure protection against disguised employment legislation, otherwise known as IR35. This is best done by making sure you have guidance from an expert, either a legal advisor or contractor accountant, to see that all contracts are correctly worded. Tax investigation insurance is another business essential. The average contractor is around £300 per better off by setting up a limited company, but running a company of course means additional administrative and accounting work, the latter of which most business owners are not qualified to administer efficiently.
Hire an accountant!
Drawing money from a limited company in the most tax efficient way possible is central to the success of your business. Expertise in accounting is required in order to make efficient tax-planning decisions; but an online contractor accountant compliments this expertise by using technology to enhance their services.
The best accountant is an expert in contractor accounting with online capability
Limited company contractors have many tax planning opportunities, i.e. how to time dividend declarations and structure the company shareholdings are two important aspects of tax planning based on your company profits.
Online, in real time
Online, cloud-based bookkeeping and accounting software ensures you and your accountant have a real-time window onto your business, which makes expertise in tax planning an even more powerful force behind personal income and business growth. When business owner and accountant share the same data on all business transactions, better decisions are made, which also promotes efficiency, compliancy, transparency, and better protection, should you ever come under investigation.
How does online contractor accounting help?
When paid through PAYE as an employee you earn an annual salary. Typically, you are paid once a month, net of tax and any other deductions (such as pension contributions). From the tax point of view, things change when you run a company:
- The company pays tax on its profits;
- The business owner pays personal tax on anything drawn from the company;
- Limited company contractors pay corporation tax at 20% on all profits plus personal tax;
- You have allowable expenses;
- You may pay rent on an office or work from a home office, both of which are allowable expenses.
- Enough profits in your company accounts to cover any dividends you declare;
- A proportion of your dividend income put aside to pay income tax liability;
- Keeping accurate records, i.e. of dividend vouchers and board meeting minutes.
How do you pay yourself a salary?
A specialist online contractor accountant with the expertise and knowledge as well as the technology is able to spend more time working out how to make sure you earn more, through salary and dividends, but in other ways as well. When able to effortlessly keep up to date with bookkeeping and accounts in real time, your accountant is going to have the opportunity to practice the real art of accounting; yes, the figures, but also advising you on ways to manage your company more efficiently, keeping up with changes to tax laws and meeting your company’s tax deadlines. This as you can image is a huge bonus.
Paying an accountant
A contractor accountant with online bookkeeping and accounting software typically offers lower fees than an accountant that does not offer online capability. Contractors are beginning to appreciate that it makes good business sense to hire an online contractor accountant that offers free bookkeeping and accounting software as part of a very competitive contractor accountancy package. All contractors should become part of the DNS online contractor accountant revolution.