One of the main reasons people decide to stop being an employee and become a Contractor instead, other than having more control over their lives, is that Contractors usually make more money than employees.
Here’s why it’s true that Contractors make more money than employees.
Become tax-efficient and take home more money as a Contractor
As an employee, PAYE means that income Tax and National Insurance Contributions are deducted from your salary before you receive any money.
However, Contractors working as a limited company have a little more choice in how they pay their taxes, meaning that, with the help of an accountant, they can be more tax-efficient.
Why can Contractors become more tax-efficient than employees?
Unlike employees, Contractors can take home more of the money they earn because the limited company they work as can pay them a small salary so that only the minimum National Insurance Contributions and Income Tax is paid.
But, because a Contractor is also the owner of the limited company they work as, they can make up the rest of their earnings by receiving dividends (after Corporation Tax is paid on the company’s profits).
While dividends are subject to Dividends Tax, it is the balance of the two methods a Contractor can use to pay him or herself that minimises the taxes owed, and thus means Contractors can earn more money than employees, especially with the help of a specialist Contractor accountant.
Reducing Contractor taxes further with expenses
Another reason why a Contractor gets to keep more of the money they earn than employees is that a Contractor can claim expenses on work-related costs, which reduces their profits, and so reduces their tax bill, something an employee is not able to do.
Contractors can claim expenses for a number of items and things needed for them to carry out their work, including laptops, lunch, travel, office furniture and equipment, broadband and phone line costs, etc.
Contractors can also offset any VAT paid
Unlike employees, Contractors can offset the VAT they pay on items such as laptops and other business-related equipment with the VAT they charge on their invoices, effectively saving money on any of the items they buy.
Take home more money with the help of a specialist Contractor accountant
1Stop Accountants specialise in helping Contractors. We not only show Contractors how to make money than employees, but we can help with very Contractor-specific issues such as IR35 regulations. View our dedicated section on Accountants for Contractors for a detailed description of our specialist accounting services for Contractors.
Get in touch with 1Stop Accountants now for a free initial consultation.