Contracting Wisdom: Don’t let the tax tail wag the spending dog

I’ve recently started a new job where I am set-up through a Limited Company, contracting to a range of companies on work that is short term, insecure but well rewarded. This is a similar arrangement as for a lot of people in the UK. There are certainly advantages to this arrangement for me and the companies I work for. And one of these is getting to expense things that you might otherwise pay for.

With company spending – Tax saved is still money spent.

Limited company can really work for you. No wonder the government wants to crack down on it (see the IR35 news). The advantages are not just around tax but tax forms a part of it. The company I contract myself to pays my company direct and my limited company pays the tax due on that.

Image result for ir35For salaried employees, the company pays all Tax, National Insurance and Employers National Insurance as well as pension and other benefits. These all add up and the tax burden for marginal pay rises for 40% tax payers is around 50% (40% tax, 2% NI, 13.8% employers NI). This is the world of the PAYE

Paying yourself through a limited company in dividends is more tax efficient than if you were paid as an employee. There are greater risks being a contractor or being outwith IR35 so it’s not all a bed of roses (no sick pay, no holidays, no paid training, no guarantee of any work and so on.)

Most contractors I speak to try to avoid paying the 32.5% dividend tax on profits (after the corporation is taxed at 19% meaning effectively 45% tax overall) and try to keep to the lower 7.5% tax on dividends meaning they take out up to around £45,000 out of the business each year. If the company has more in it than that, then what they do with the rest is up for much discussion (BTL is popular).

There is a bit of admin associated with running your own company and this includes managing your invoices, bookkeeping, accountancy, pension, payroll, expenses and tax. The sort of thing that I love but it’s still a ball-ache.

One advantage of going contract is that you are able to offset business expenses against your income. If you earn £50,000 a year and spend £10,000 on legitimate business expenses then you are only taxed on the £40,000 not the full £50,000.  These expenses for me include professional indemnity insurance, professional membership fees and mileage to/from work. These are all unavoidable – but there are some expenses which are discretionary – like spending money on a car for work or fancy stationary, living it up by “entertaining” on expenses, hotels, train travel, flights etc… It can be easy to just start thinking about how to spend that company money legitimately. But if you are inwith or outwith IR35 it can make a huge with the graph below giving an idea of the advantages:

Image result for ir35 tax comparison

Tax saved is still money spent

Legitimate business expenses include computer hardware/software costs, internet and telephone and mobile phones. That could mean that you go out and buy yourself a new laptop and the latest iPhone. You can also claim back the VAT. People do it and if you don’t  maybe you’re not get aid as much , maybe you are lower status than your peers – so there’s a tendency for people to splurge on company spending.

Spending like this does save money because you are not paying the tax on it and this could mean that you “effectively” pay half of what the thing costs. The more you spend the more you save! But people tend to lose their heads when it comes to money and there’s a sort of Brewsters Millions effect going on. Spend it before you blow it!

Image result for brewster's millions
These cheques don’t write themselves.

Except, I’m just a bit too tight-fisted to go loosen the company purse strings so quickly.

Image result for galaxy s4 mini
Galaxy S4 mini – yours for around £40 second hand

At home, we had an old laptop (bought 2013 or so) and I have an old Samsung S4 mini from 2014 – my old unlocked work phone sadly died. It’s a great little phone without too much functionality so I don’t waste too much time on it. It’s small, light and fits in my pocket and hands.

For the computer, I paid for some anti-virus software for £20 and spruced it up – got 35% cashback too! Then I ordered a new sim for the phone (£6/month for what I need) with £15 cashback for that.

I could have gone out and bought even a new laptop and phone (I looked but prefer the compactness of the mini) and spent maybe £500 on both – doing it cheaply – and got a more expensive contract for the phone with all the bells and whistles.906cd104af6d29b73bb8e1635f484106bf419e2910fecef9abb5ee13acf020b6

Instead, I’ve not only saved £500 but I’ve got something that’s fit for purpose (plus the phone fits in my pocket). That £500 can sit in my company accounts – it’s not going anywhere. Maybe I’m just a cheapskate – I could easily spend a bit more money but I like driving my old banger of a car, using a prehistoric phone and a laptop that is steam driven – but I don’t really mind, I’m happy.  There’s being cheap and being frugal – I’m trying to stay on the sensible side of things. More importantly, I’m not letting the allure of “free” money drive my spending choices or in other words I’m not letting the tax tail wag the spending dog.

Have any of you got experiences of the temptation of spending the company money? It can seem too good to be true. Let me know.

Thanks, GFF


  1. The 0% BIK and 100% capital allowance for an Electric Vehicle from April 2020 is going to be our company money splurge.
    Tesla Model 3 here we come
    (This will be after we max out our SIPPs and ISAs for two tax years)


    1. at £42,000 it’s a bit of a thinker.
      Is it worth spending all that money to save all that money? I think that if you were going to buy a new car for around the same price (or less) then it’s a no brainer.
      If you go to Olso you’ll see Teslas all over the price – the high price tag is compensated by the high tax reliefs and other benefits (free tunnel/tolls/bridges…)

      I might write a post about it because if the numbers are right for the Tesla I can see the numbers sold booming.


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