12 ways IT contractors can pay less tax

Reducing overheads isn’t traditionally high up the agenda for the one-person, knowledge-led contractor business, typically able to operate without staff, a premises or too many hardware costs. But the return of ‘take it or leave’ rate cuts – a sign clients are belt-tightening – will cause some contractors to think otherwise. At the very least, all IT contractors might wish to consider the tax-saving opportunities on offer, writes Richard Bayliss, managing director of Low Tax, a chartered tax specialist:

1. Keep your accounting records and business receipts in good order. This means that your accountancy fee may be lower, as there are less likely to be mistakes and misunderstandings. HM Revenue & Customs are also much less likely to launch an investigation

2. Consider taking out Fee Protection to cover legal and accounting fees in the event of an HMRC enquiry or investigation

3. Keep your bank account reconciled. This will avoid extra bank charges and will help you to see that your agency has paid you the right amount, on time

4. If you owe your  own limited company less than £5,000, then there will be no tax consequences

5. You can even borrow an extra £1,000, as long as it’s an advance of business expenses, actually spent with six months. You must also keep proper records of the expenses

6. Rather than pay tax on money drawn from the company to invest, consider forming a Personal Holding Company to receive the money tax-free and to make the investments

7. Make sure you treat your income as a director as a “fee” rather than a salary, which makes you free to set the level

8. Make sure your directors “fee” is below the personal allowance to ensure that as much income as possible is taxed at the lower dividend rate

9. Try and keep your personal income below £100,000 to avoid the effective 60% tax rate charge on the next £15,000

10. If it is available to you, use your spouse’s lower tax band by appropriate “income shifting”

11. On the road, claim the maximum 45p tax-free mileage allowance for the first 10,000 miles of business travel

12. In December, throw an annual party for your company courtesy of HMRC – up to £150 per employee tax-free is permitted.