Here at dns we support thousands of contractors around the UK and our team help them to not only stay compliant but maximise their earnings, IR35 rules and advise them on the best structure for their business.
In this blog, we’ll cover the top 5 contractor questions that our account managers are asked on a regular basis.
1) How do I as a contractor maximise my take home pay?
There are a few ways that contractors can maximise their take home pay. Ensuring you’re operating outside of IR35 is one way to ensure you take home higher pay.
Don’t forget that as a contractor, you can charge more for your services than if you were an employee.
A limited company will also allow you to claim a wider range of expenses and therefore retain more of you hard earned income.
As a contractor and director of a limited company, the other way to maximise your take home pay, is to pay yourself a minimum wage salary and dividends for the rest of your income. Dividends are taxed at a much lower rate than salary and although you’ll need to pay corporation tax for your limited company, your take home pay will be significantly more than an employee who will pay income tax on all their earnings.
Further the company can make direct contribution into your personal pensions which are tax deductible for the company and there is no personal tax for you to pay.
One other way to maximise tax free allowances, would be to add your spouse as shareholder to use their £2,000 dividend allowance.
If you want to further maximise your take home pay and take advantage of tax reliefs and benefits, then the company can pay for relevant life cover.
In addition to the above there are benefits now for people to have a company car if it’s an electric vehicle.
2) What expenses can I claim from my company?
If you’re contracting via your limited company, you can claim expenses that are incurred wholly and exclusively for your business. Examples of these are:
- Mobile phone costs (the phone must be in your company name).
- Business stationery, printing, and equipment costs.
- Business premises expenses, like rent, utility bills, property insurance etc.
- Business travel expenses like mileage, meals, train, and bus costs.
- Stock and raw materials.
- Professional expenses such as fees from your accountant or solicitor.
- Marketing expenses.
For a full guide on expenses you can claim, why not download our expenses guide.
3) Can I take a loan from my company?
It is possible as a contractor to borrow money from your company. Whether that is a small sum for a short period or a larger sum for a longer period. The first thing to consider is have you left enough money in the company to cover its liabilities for overheads, but more importantly for tax bills.
You should record the loan taken and the terms of the loan in a Director’s Resolution. If the loan is over £10,000, you need the formality of shareholders’ approval to comply with the Companies Act.
If you take a loan and it is interest-free or at a lower interest rate that the official interest rate at the time, then you will incur a taxable benefit in kind charge as an individual. This is recorded on form P11D at the end of a tax year. The company will also incur a secondary NI cost on the value of the benefit in kind.
If the loan is over a long period of time, the company may become liable for additional Corporation Tax. This Corporation Tax can be recovered when the loan is repaid to the company.
If the loan remains outstanding for a long period of time, then the company may become liable for an additional payment of Corporation Tax. If you are a director and/or a shareholder, you are called a Participator. If any loan at year-end to a Participator, or an associate of a Participator, remains outstanding 9 months and 1 day after the end of the company’s accounting period will mean that the company must pay an amount of Corporation Tax equal to 32.5% of the amount still outstanding.
There are additional rules you must consider if the loan is never repaid.
So, it is possible to take a loan / borrow money from your company, but there are many rules on how much the loan is for, the repayment term and the interest rate used. It’s advisable to seek advice early on from your accountant / qualified tax advisor.
4) Can my limited company lend money to a friend of family member?
Although it’s possible to give a loan to an individual from your company, we would NOT advise you to do this. If your company does loan money to an individual i.e. a family member, employee,or an associate employee, then many of the same principles apply as for loans to participators.
We would only recommend loans to other companies from your limited company wherever possible and ensure that the loan is subject to a legal contract and given on commercial terms.
5) Can I run two different businesses through my company?
The simple answer to this is, yes you can run different businesses through one limited company. There is legal restriction on the activities that a contractor can run through a limited company. Other shareholders can set limits (via Memorandum of Association), but normally this doesn’t pose huge obstacles.
You should account for each activity separately. If you run at a loss for one activity, you can utilise profits from your other activity. But be careful not to run at loss for both activities.
You can deduct expenses from either activity from your total earnings.
You can also use your limited company to own and operate another company. This helps to separate your books / accounts, protect the businesses from legal risks and will keep them separate from a tax perspective, but it will double the administration / paperwork.
For more detailed answers to the contractor questions above or if you have any other questions about contracting, IR35, owning a limited company or an umbrella company, then don’t hesitate to contact us.
Any questions? Schedule a call with one of our experts.
Whether you prefer to meet and speak over the internet, or if you prefer an in person conversation we can help you with your preference.
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