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Contractors

Advice and guidance on salaries, dividends and expenses

When you're self-employed or working through a limited company, you need to know how to structure your pay to ensure maximum tax efficiency. This pay structure includes your salary, limited company salary dividends, or self-employed salary dividends and expense reimbursements.

Limited company expenses

As a limited company contractor, you will be able to claim expenses for any costs that you incur as a result of the running of your company. Many of these costs can be deducted against your company’s Corporation Tax bill, as long as they are allowable expenses.

Important company expense rules

The golden rule for expense claims is that you can only reclaim expenses that have incurred “wholly and exclusively” for the running of your business. Expenses that have a dual purpose, i.e. things that can be used both for your business and in a personal capacity, cannot be reclaimed.

Receipts and expense-related paperwork must be kept in a safe place as proof of your expenditure. This is particularly important should HMRC decide to challenge any claims or require any information from you. HMRC can investigate claims that go back as far as seven years.

Expenses may be paid directly via your company’s bank account or out of your personal bank account. If you choose the latter, you can reclaim the cost from your company and reimburse yourself.

Most expenses can be used to lower the company Corporation Tax liability, although there are some noteworthy exceptions, such as business entertainment.

Typical limited company expenses

There are various types of limited company expenses for which you can claim. These can include some of the following:

  • Salaries of all company employees (mostly the director/contractor only, but sometimes a spouse)
  • Employers’ National Insurance Contributions (NICs)
  • Pension scheme contributions
  • Accountancy fees (Please note that your personal tax return fee is not a company expense)
  • Advertising and marketing costs for your company
  • Client entertainment can be reclaimed if it has been paid for personally, from the company but it is not “allowable” as a business expense against Corporation Tax
  • Training, if directly related to your contract work
  • Company stationery, business cards, postage, printing
  • Company website or software costs
  • Office equipment such as personal computers, laptops and accessories
  • Bank account charges of the limited company bank account(s)
  • Professional indemnity cover
  • Journal subscriptions and periodicals, if related to your contract work, and allowed by HMRC
  • Professional body subscriptions that appear on HMRC’s list of allowed groups
  • Telephone, mobile and internet costs, as long as the contract(s) are in your limited company’s name:
    1. If you use your personal phone/mobile to make calls, you can reclaim those individual calls (not the whole bill)
  • Travel and subsistence costs (these are all subject to the 24 month rule):
    1. Under the 24 month rule, a contract that lasts for more than 24 months is considered a permanent workplace and therefore cannot be claimed as a business expense
    2. Accommodation while away from home
    3. Subsistence costs while away from home
    4. Travel costs including public transport and parking expenses when travelling to sites other than your regular workplace
  • Using your own car or motorcycle for business travel:
    1. You can reclaim 45p for the first 10,000 miles, and 25p thereafter
    2. Accommodation while away from home
    3. 20p per mile is claimable for motorcycles regardless of the total number of miles
  • Home office costs:
    1. If you work from home, a percentage basis may be used to reclaim costs such as rent (or mortgage interest) and utilities
    2. Alternatively, there is a flat £4/week (£18/month) allowance for running a home office
  • Medical costs for each employee:
    1. An annual eye test (if computer equipment is used)
    2. Private medical checkup per tax year
  • Other professional fees, such as lawyers or liquidators
  • Company administration costs such as the annual confirmation statement fee (£13) to Companies House
  • The incorporation cost of your limited company is not deductible against Corporation Tax, even though you could repay yourself the cost of that (assuming that you would pay for that out of your personal pocket)
  • Childcare costs of up to £243 per employee, depending on your income tax band:
    1. From October 2018, only existing childcare voucher schemes will remain active and will become unavailable to new applicants
  • A Christmas party and other annual events, up to £150 per head (in total) over a year
  • You can provide gifts to business clients worth up to £50 per recipient

Pre-trading expenses

It may be possible to claim expenses incurred in the time before your company was established. These can include legal advice, business insurance policies, travel costs, phone bills and domain names/hosting.

The criteria for these types of expenses are:

  • The expenses must have been incurred “wholly and exclusively for the purpose of the trade”
  • If an existing business pays for the set-up costs related to the new company, the new company cannot claim these expenses
  • Training costs are not claimable if incurred prior to trade starting by the new company

Tax on company benefits

Any expenses paid for by your company from which you benefit personally will trigger a “benefit in kind”, which is taxable to you personally. This may be subject to National Insurance charges and income tax. Types of expenses that may trigger a “benefit in kind” can include things such as a gym membership or a company car.

Expense claims can be a complicated area of taxation. Contact your accountant to ensure you are claiming legitimate expenses and avoid the headache of unintentionally falling foul of the rules.

Salaries

Salaries paid to the director and any other employees are also claimable expenses for your limited company. However, PAYE and NI are usually payable on any salaries. There are various rates and thresholds for PAYE and NI.

Ask your personal accountant to:

  • Advise you on what levels of your salary will be tax-efficient
  • Advise you on which PAYE and NI will be payable
  • Apply for your company’s PAYE scheme
  • Let you know when and how to pay PAYE and NI

Dividends

If you are the director and/or a shareholder of a limited company, you can pay yourself a portion of the company's after-tax profits in the form of dividends. Limited company salary dividends are taxable (after some tax-free allowances), but at lower tax rates when compared to salary income, within both the basic and higher rate tax bands.

Because of the tax-free allowance on dividends, they are one of the most tax-efficient ways of withdrawing funds from the company. However, depending on your circumstances and future plans, you may be able to retain funds in your company for withdrawal at a later (and more tax-efficient) date. Your best bet is to discuss the options with your personal accountant or one of Sable International's financial advisors.

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Doncaster Road
Kenilworth 7708 +27 (0) 21 657 2120

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United Kingdom

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CR2 6PU +44 (0) 20 7759 7581

Australia

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9 Yarra Street
South Yarra
VIC 3141 +613 (0) 8651 4500

Sable International is a trading name of 1st Contact Money Limited (company number 07070528), registered in England and Wales. We are authorised and regulated by the Financial Conduct Authority in the UK (FCA no. 517570), the Financial Services Conduct Authority in South Africa (1st Contact Money [PTY] Ltd - FSP no. 41900) and hold an Australian Financial Services License issued by ASIC to deal in foreign exchange (1st Contact Group - AFS License number 335 126).

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