Contractor Pay Guide

1. Optimal Salary and Dividends

For limited company directors, a common strategy is to pay a relatively low salary (often around the National Insurance threshold) and extract further profits as dividends.

• Salary: A small salary can be tax-efficient as it's a deductible expense for Corporation Tax. It can also count towards your State Pension qualifying years.
• Dividends: Dividends are paid from post-Corporation Tax profits. They are not subject to National Insurance, which can be a significant saving. However, dividend income has its own tax rates and allowances (e.g., the Dividend Allowance for 2024/25 is £500, but always check current rates).

The optimal mix depends on your personal circumstances and current tax thresholds. Our IR35 calculator can help you model different scenarios.

2. Claim Allowable Business Expenses

When Outside IR35, your limited company can claim a range of business expenses. These reduce your company's profit, and therefore its Corporation Tax liability. Common expenses include:

• Office costs (e.g., a portion of home running costs if you work from home).
• Travel and subsistence (for business-related travel).
• Training courses relevant to your contract work.
• Professional subscriptions and insurance (like Professional Indemnity).
• Accountancy fees.
• Equipment essential for your work.

Always keep meticulous records and receipts. See our article on Navigating Business Expenses for more details. Further guidance on expenses can be found on the HMRC website for self-employed expenses.

3. Pension Contributions

Pension contributions made directly from your limited company are typically a highly tax-efficient way to save for retirement.

• Employer contributions to your pension are generally allowable business expenses, reducing Corporation Tax.
• They don't attract Income Tax or National Insurance for you personally at the point of contribution (within annual allowance limits).

Explore Pension Strategies for Contractors.

4. Consider Timing of Income

If you have flexibility, consider the timing of when you draw income (especially dividends) from your company. This can be useful if you anticipate changes in your income levels or tax rates in future years.

5. Stay Informed and Seek Advice

Tax laws can change. Regularly review your tax planning strategy and consider consulting with a qualified accountant who specializes in contractor taxation. They can provide personalized advice based on your specific situation. Official information can always be found on the government's tax pages.