If you’re new to working on your own and have just started contracting – and therefore have started your first business – you will also be new to the idea that expenses you incur in the course of your work can be offset against your earnings when it comes to taxation. Of course as with all things in the world of contracting there are various ways you can do this and the amount you can claim depends on the different company structures you are able to choose from. But the basic principle remains the same, that if you pay for expenses with your own money your company can reimburse you for these and the taxman will then take them into account when it comes to filling out your tax return. Expenses will not be taxed. This means that if you are working on a £15,000 contract and you don’t incur any expenses you would pay tax on that full £15,000. However, if you have to pay travel and hotel costs and buy some new equipment or stationery and therefore spend £1000 on expenses you would only end up paying tax on £14,000 for that contract. There are of course other issues to consider in this calculation (such as PAYE salary and dividends) but the principle is easy to understand. However, when it comes to expenses it is worth reading up on what you can claim and how you can claim it before deciding which company structure will suit your contracting lifestyle. This article will provide a brief overview:
If I Set Up A Limited Company, What Expenses Will I Be Able to Claim?
If you’ve got a free week you could always download and read the thrilling ‘Expenses and Benefits: A Tax Guide‘ which was released by HMRC to cover all the ins and outs of expenses. It’s worth keeping a copy to refer to if you’re ever uncertain about something. Meanwhile, the basic rule is simple. If you own and run a Limited Company for your contracting and you are not IR35-affected then you can claim expenses that are exclusively and wholly for the purpose of your business. This covers all kinds of things from contributions to a pension, NI contributions, entertaining and eating out for business, insurance, memberships, subscriptions, phone bills, postage, accountancy fees, business equipment, office equipment, stationery and travel costs. Of course, there are rules to each type of claim and expenses have to be claimed carefully. Here are some of the most common:
Pensions – This is a very important area for contractors as pensions still offer significant tax breaks for the contracting sector. By investing some of their income in a Company Pension Scheme contractors avoid income tax on that part of their income as well as cutting down their employees and employers national insurance contributions. The tax relief that you can get on this is as much as 48% so it is one of the most important expenses allowances a contractor should make use of.
Training – Another area of expenses that is particularly useful to contractors is training. Because all training expenses are deductible it is imperative that contractors take advantage and take whatever training they can. Provided the training course is relevant to the performance of their duties while contracting, it should be fully deductible – and is therefore worth doing in order to extend your range of skills.
Travel – If you are travelling to your temporary working place then the cost of that travel is considered an expense and is a valid deduction. You are allowed to claim for the cost of getting to and from work by car at a rate of 45p per mile up to 10,000 miles and thereafter 25p per mile. This is not only for the fuel but also intended to cover the running cost of the car. Should you just be a passenger in the car you are still entitled to claim 5p per mile. Additionally you are allowed to claim congestion and parking charges although it is important to note that you are not allowed to claim for parking tickets or speeding tickets! You can also claim any journeys on public transport but you must have the receipts for this.
Meals – Food eaten while away at your temporary working place is tax deductible but it is for the actual meal costs and not a round daily sum, so once again receipts are important.
Accommodation – Similarly, if the place you are working is too far to commute, then it is ok to take overnight accommodation and breakfast and to claim it as a legitimate expense. So long as the accommodation is ‘reasonable’ then you can claim it all back as an expense.
Can I Claim Expenses if I Am In IR35?
Within IR35 you are very limited when it comes to expenses and you are only able to claim for administration expenses at 5% of your contracting income, pension expenses and travel expenses.
Do I Need to Hold on to My Receipts?
Your accountant wont need to see them but many people prefer to hold onto them for up to 6 years in case HMRC come calling and want to investigate your old accounts.
What Can I Claim in an Umbrella Company?
It is a myth that you are not able to claim any expenses within an umbrella company. The criteria however, are slightly tighter than in a limited company. Expenses in a limited company must be ‘wholly and exclusively for business use’ whereas for an umbrella they must be ‘wholly, exclusively and necessarily in performing their duties.’