Contracting is a very lucrative career path. It is common for experienced workers who have completed a number of senior permanent roles to switch to a contracting career to further expand their field of experience. Experienced contractors can offer companies authoritative advice on issues that matter to them, and they tend to get paid very well for doing so. However, contracting brings a complication in that you are entirely responsible for managing your own financial affairs, which includes filing taxes with the authorities.
The importance of correctly reporting your income
It goes without saying that tax avoidance is illegal and costly. It is also easy to get it wrong unintentionally, and ignorance won’t be seen as an excuse – you will at least face heavy fines if you underreport. Make sure that you leave enough time to register with HMRC before you start contracting as the process can take a while, and you should register before you start earning. Keeping a calendar of key return dates is also important – missing dates will lead to fines and an increased tax bill.
Many contractors find that the task of filing financial returns is simply not an effective use of their time. It’s worth hiring an accountant if you’re either pressed for time or just very unsure about what the correct course of action is. An accountant will make sure that you go through the right registration process, and will help you find the most tax-effective solution. This may be forming your own limited company of which you’ll be the director, or it may be working through an umbrella company.
Contractors and IR35 legislation
It’s important to note that HMRC has some specific requirements that are intended to make sure that contractors pay their fair share of tax. IR35 is aimed at contractors who supply services to clients through a limited company, and is a case of HMRC not recognising the contractor as self-employed, but rather as functioning as an employee of the limited company.
There are significant financial implications to falling under IR35, and attempting to side-step the rules will result in fines. Working with an umbrella company is an increasingly popular option with contractors as they offer help with IR35. Instead of operating a limited company, a contractor can work under an umbrella company – still getting some of the benefits of a limited company, but without the added stress of having to navigate the ever-changing HMRC landscape.
Expenses on your tax return
A benefit of operating as a contractor is that you can include expenses on your tax return. Costs that you incur that are related to your work as a contractor can be deducted from your earnings to reduce your total tax bill. One example is if you entertain clients: if you have businesses lunches with clients, you will be able to reduce your tax bill proportionately. HMRC has a rule of thumb that you can only claim back expenses that are genuine costs of doing business, but this is still a very wide net that can include costs ranging from internet access, to subscriptions, to publications.