10th December, 2021 I’m often educated by my law trained business partner as to…
Life as a Contractor: Exploring the Key Advantages of Contracting
In today’s ever growing agile workforce, many individuals are opting for the freedom and flexibility that comes hand in hand with contracting. This shift from traditional PAYE (Pay As You Earn) employment to contracting is often driven by a desire for autonomy, increased earning potential along with potential tax savings. In this blog, we’ll explore the life of a contractor, uncovering the key advantages that make contracting an increasingly popular choice, and the motivations behind the switch from PAYE.
Flexibility of a Contractor
One of the most desired benefits which contracting offers is the flexibility it brings. The rise of remote working has further enhanced the appeal of the ‘contracting lifestyle’.
Many contractors have the flexibility to work from anywhere, eliminating the need for a fixed office location, the freedom to choose a preferred working environment is a consistently growing desire within the changing dynamics of the modern workforce.
Diverse Range of Projects
Contractors often enjoy exposure to a diverse array of projects and from various industries, this variety not only keeps the work interesting but also allows contractors to continuously acquire new skills and knowledge. Moving from one project to another provides a rich learning experience and can enhance a contractor’s marketability in the long run.
Increased Earning Potential
Contracting can significantly boost earning potential compared to traditional employment. Contractors often charge higher hourly or project-based rates, reflecting their specialised skills and the value they bring to a project. Moreover, the ability to negotiate fees and take on multiple projects simultaneously can lead to a more lucrative income stream.
While navigating the complexities of tax as a contractor requires careful consideration, it also provides opportunities for tax efficient planning. Contractors can often take advantage of business expenses and deductions that may not be available to traditional employees. This includes deductions for home office expenses, travel, and professional development, ultimately reducing their taxable income.
The decision of how to operate as a contractor (i.e. as a sole trader, partnership, or limited company) allows for a more tailored approach to tax planning, that takes into account an individual’s personal circumstances and long-term goals.
Choosing the right business structure, such as operating through a limited company, can significantly impact a contractor’s tax liability. Limited companies often provide a more tax-effective way of working, allowing individuals to receive a combination of both salary and dividends, each with their own tax rates.
Tax Efficient Income
In some circumstances, contractors have the ability to legitimately distribute income among family members, optimising the use of personal allowances and lower tax bands.
Contractors can strategically use personal allowances, dividend allowances, and other tax thresholds to legitimately minimise any tax liability. The strategic use of allowances is a key aspect of financial/tax planning for contractors.
Contractors often enjoy a broader range of deductible expenses compared to traditional employees. This includes expenses related to home offices, travel, professional development, and even certain technology investments. Maximising these deductions can significantly reduce taxable income.
Contractors have the freedom to structure their pension contributions in a tax-efficient manner in a way that is tailored to their individual circumstances. This allows for effective retirement planning, taking advantage the tax reliefs on pension contributions and ensuring a tax-efficient approach to long-term financial security.
From choosing tax-efficient investment vehicles to timing investment transactions, contractors have the autonomy to structure their financial portfolio in a tax efficient manner. This includes choosing investments that offer tax advantages, such as certain ISAs or venture capital schemes.
The availability of tax reliefs such as Business Asset Disposal Relief provides an additional incentive. Qualifying individuals can benefit from reduced capital gains tax (CGT) when disposing of qualifying business assets.
Flat Rate VAT Scheme
The option to use HMRCs Flat Rate VAT Scheme is particularly attractive for contractors with a VAT turnover below the threshold of £150,000. It works by paying a fixed rate of VAT to HMRC while keeping the difference between what your customers are charged, and what is paid to HMRC.
Long-Term Tax Planning Advantages
Long-term tax planning allows contractors to plan for their financial future, incorporating tax-efficient strategies into their overall financial planning.
The Contractor Lifestyle
The ‘contractor lifestyle’ is not only about professional independence, it’s also a strategic approach to tax planning. The advantages of contracting, from a tax perspective, make it an appealing choice for individuals seeking financial efficiency, flexibility, and control over their financial future. The switch from PAYE to contracting is a move often driven by the desire to strategically navigate the tax landscape and utilise the unique tax advantages that contracting offers. While contracting brings its own set of challenges, the ability to navigate and leverage these benefits makes it an enticing career choice for individuals who value independence, continuous learning, and the freedom to shape their professional future.
Tax Advice Tailored to You
At WTT, we specialise in helping contractors with tax. Our team is comprised of experts in tax, legal and accounting, offering a broad range of services to individuals, corporates and trusts. From assisting with accounting processes and offering support on the life cycle of a business, to compliance advice and future planning, whatever your needs we’re here to help.
Contact us today at firstname.lastname@example.org or call us on +44 (0)20 3468 0000.
‘A Day in the Life of a Contractor’
A Day In The Life Of A Contractor’ helps to shed light on the key tax considerations when starting up in business, all the way to shutting up shop and unwinding your limited company.
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