I meet self employed contractors and small business owners every week who are shocked when I tell them how much they’re overpaying in tax. We’re not talking about small amounts here. I’m talking about £3,000, £5,000, sometimes even £10,000+ in tax overpayments that could be claimed back as a tax refund every single year.
The worst part? Most contractors don’t even realize they’re paying too much tax. They assume their tax code is correct. They think HMRC has sorted it all out. But the reality is, thousands of pounds in tax relief goes unclaimed every year simply because people don’t know they’re eligible.
You work hard for your money. You put in the hours, you deal with difficult clients, you handle the stress of running your business. And then a massive chunk of what you earn goes straight to HMRC in income tax. Fair enough, we all need to pay our taxes.
But what if I told you that a lot of that money didn’t actually need to go to HMRC? What if you could legally reduce your tax bill and keep thousands more of your own money, just by claiming the allowable expenses and tax deductions you’re entitled to?
Let me show you the five biggest warning signs that you’re probably paying way too much tax.
Sign 1:You’re Taking a Salary Over £12,570 (Your Personal Tax Allowance)
This is the number one mistake I see with limited company directors.
And almost every single contractor who comes to us is doing this wrong.
Here’s what usually happens…
Someone starts their limited company, they Google “what salary should I pay myself as a director”, and they end up paying themselves something like £25,000 or £30,000 or even £50,000 as a salary through PAYE.
BIG MISTAKE!
When you pay yourself a salary over the £12,570 personal allowance, you immediately start getting hit with National Insurance contributions.
You pay 12% employee National Insurance.
Your company pays 13.8% employer National Insurance.
That’s over 25% in National Insurance alone before income tax even kicks in.
Why would you do that to yourself?
The tax efficient strategy is to pay yourself exactly £12,570 per year as salary.
That’s £1,047.50 per month.
At this level, you pay zero income tax, zero employee NI, and zero employer NI.
But you still get your full state pension credits for the year.
Everything else should come out as dividends. And dividend tax rates are way lower than income tax on salary.
Let me give you a real example of the tax savings.
I had an IT contractor come to me last month. Nice guy, been running his limited company for 3 years. He was paying himself a £45,000 salary through payroll.
We did the calculation. If he switched to the optimal salary of £12,570 plus £32,430 in dividends instead, he’d save £2,847 in tax and National Insurance every year. Every single year. That’s nearly three grand he was just handing to HMRC for no reason.
Over 10 years? That’s almost £30,000 in tax savings. Think about what you could do with an extra £30,000. New car. House deposit. Actually enjoy a proper holiday without stressing about money.
Sign 2: You’re Not Claiming All Your Business Expenses (Tax Deductible Costs)
This one drives me crazy because I see contractors and small business owners leaving so much money on the table with unclaimed business expenses.
Every pound you claim as a tax deductible expense saves you 19p to 25p in corporation tax. Doesn’t sound like much? These tax savings add up fast.
Most people claim the obvious allowable expenses. Laptop. Phone bill. Maybe some business travel. But they’re missing loads of tax deductible costs they could legitimately claim for tax relief.
Home office expenses. You can claim £6 per week with no questions asked from HMRC.
That’s £312 per year in expense claims. Or you can claim a portion of your actual costs if you calculate the percentage of your home used for business purposes.
Professional subscriptions and training. That LinkedIn Premium you’re paying?
If you use it for business networking, it’s a claimable expense.
Industry memberships? Claim them as allowable business costs. That £500 course you took to learn a new skill for your work? Fully tax deductible.
Business mileage claims. This is huge for tax relief.
If you drive anywhere for business purposes (not commuting to a permanent workplace, that doesn’t count), you can claim 45p per mile for the first 10,000 miles as a business expense.
Most self employed people either don’t track mileage at all, or they track it badly and miss loads of journeys.
I had a consultant client who was driving to different client sites 2 or 3 times a week.
Never claimed a single business mile.
When we went back and reconstructed his mileage claims for the year, he’d done about 8,000 business miles.
8,000 miles at 45p is £3,600 in claimable expenses he could have deducted. That’s a tax saving of nearly £700 in reduced corporation tax. Just from tracking his business mileage properly.
Working from a coffee shop sometimes? You can claim those coffees as subsistence expenses
if you’re working away from your usual place of business.
Got business insurance? Professional indemnity? Claim it as a business expense.
Accountancy fees? Claim It!.
Software subscriptions like Microsoft 365, Adobe, project management tools? All allowable expenses you can claim.
The problem is that tracking all these tax deductible expenses manually is a nightmare. That’s why we handle expense management for our clients using cloud accounting software. But here’s the thing. Even with good software, you need to know WHAT qualifies as allowable business expenses. And that’s where most contractors fall down on claiming tax relief they’re entitled to.
Sign 3: IR35 Rules Are Making You Overpay Tax as a Contractor
IR35 legislation is complicated. Really complicated. And HMRC knows most limited company contractors don’t fully understand IR35 rules, which is why they’re aggressively pursuing IR35 investigations right now.
If you’re caught inside IR35 and deemed a disguised employee, you basically lose all the tax advantages of operating through a limited company. You get taxed like an employee with PAYE and National Insurance but without any of the employment rights or benefits.
The cost of being inside IR35? For a typical contractor earning £500 per day, being wrongly assessed as inside IR35 when you should be outside IR35 costs about £12,000 to £15,000 per year in extra contractor tax and National Insurance contributions.
But here’s what a lot of contractors don’t know about IR35 assessments. Just because your client company says you’re inside IR35 doesn’t mean their IR35 determination is correct. Client companies are terrified of getting their IR35 status decisions wrong and facing HMRC penalties, so they often just blanket assess all contractors as inside IR35 to play it safe.
We’ve successfully challenged several incorrect IR35 determinations for contractor clients. One IT contractor was told by his client he was definitely inside IR35. We reviewed his actual working practices under IR35 rules, looked at his contractor agreement, and realized he clearly met the employment status tests for being outside IR35. We helped him challenge the IR35 assessment. The client agreed to reverse their decision. He saved £14,000 that year in reduced tax.
The IR35 employment status tests look at things like:
Equipment: Do you provide your own equipment and tools?
Right of substitution: Can you send someone else to do the contracted work?
Control: Who controls how, when and where you work on a day to day basis?
Mutuality of obligation: Are you integrated into the client’s business like a permanent employee?
Financial risk: Do you take genuine financial risk in your contracting business?
Equipment: Do you provide your own equipment and tools?
Most contractors think IR35 compliance is just about having the right contract wording. It’s not. IR35 status is determined by how you actually work in practice, not what your contract says.
If you’re even slightly unsure about your IR35 status or worried about an IR35 investigation, you need to get a proper IR35 assessment done by specialists who understand off payroll working rules.
The HMRC penalties and back taxes for getting your IR35 determination wrong are way too high to risk it.
Sign 4: You Don’t Have a Tax Planning Strategy (And It’s Costing You)
Most contractors and small business owners treat tax planning like something that just happens to them at the end of the tax year. Big tax bill arrives from HMRC. Panic. Scramble to find the money to pay your tax bill. Pay it. Repeat the same tax panic next year.
That’s not tax planning. That’s just tax panic and reactive tax management.
Real tax planning strategy means looking ahead at your tax position. It means timing income and expenses strategically. It means using all the tax allowances and tax reliefs you’re legally entitled to claim.
For example, pension contributions for tax relief. If you pay into your company pension scheme, you get corporation tax relief on the contributions going in. The money grows tax free inside the pension wrapper. And you can take 25% out completely tax free when you retire.
For a higher rate taxpayer paying 40% income tax, putting £20,000 into your pension through your limited company could save you over £10,000 in total tax savings. That’s massive tax relief most people miss.
But most contractors don’t think about tax efficient pension planning until it’s too late. They get to January, see they owe a massive tax bill to HMRC, and think “oh, maybe I should have done some tax planning earlier in the year.”
Or strategic dividend planning. If you know you’re close to the higher rate tax threshold of £50,270, you can be strategic about when you take dividend payments to stay in the basic rate tax band and avoid higher rate income tax.
Or timing capital purchases for tax relief. If your limited company needs new equipment, buying it in the right tax year using capital allowances can make a big difference to your corporation tax bill.
We had a contractor client last year who was about to have a really profitable year. We sat down in October and worked out his tax planning options. If he invested in some new equipment he’d been putting off using the annual investment allowance, and made a decent pension contribution for tax relief, he could legally reduce his corporation tax bill by about £8,000.
He wouldn’t have thought to do that proactive tax planning on his own. That’s the real value of actually having a proper tax planning strategy with an accountant instead of just reacting to whatever tax demand HMRC sends you.
Sign 5: You’re Not Getting Proactive Tax Advice from Your Accountant
Here’s a massive red flag. If you only hear from your accountant once a year when they send you your tax return, you’re probably overpaying.
A good accountant should be proactive. They should be reaching out to you throughout the year with ideas and reminders. They should know your business well enough to give you personalized advice, not just generic tax tips.
They should be asking questions like:
- How’s your turnover looking this year?
- Are you planning any big purchases?
- Have you thought about pension contributions?
- Is your salary and dividend split still optimal?
- Have you checked your IR35 status recently?
If your accountant is just filing your accounts and tax returns and nothing else, you’re basically paying for a form filling service. You’re not getting any actual strategic advice.
And that lack of advice is costing you money.
I’ll be honest with you.
Some accountants are just order takers.
You send them your numbers, they file your return, they send you a bill.
Done.
No conversation. No advice. No relationship.
And that might be fine if you just want the cheapest possible service and you’re happy to figure everything else out yourself.
But if you want to actually minimize your tax and maximize what you take home, you need an accountant who acts like a proper advisor, not just a form filler.
So What Should You Do Now?
Look, I’ve just given you five warning signs.
If you recognized yourself in even one or two of these, you’re probably overpaying tax right now.
The question is, what are you going to do about it?
You could try to fix this yourself. Spend hours researching tax rules, trying to work out optimal salary levels, tracking down all your expenses, figuring out IR35. Maybe you’ll get it right. Maybe you won’t.
Or you could get someone who does this every single day to look at your specific situation and tell you exactly where you’re going wrong and how to fix it.
We offer a free first-time call consult. No charge. No obligation.
Just 10 minutes where we look at what you’re currently doing and show you where you could be saving money.
I can pretty much guarantee we’ll find something.
In the last month alone, every single person we’ve reviewed has been overpaying by at least £2,000 per year.
Most are overpaying way more than that.
If you’re reading this and thinking “yeah, I’m probably doing some of this stuff wrong”, just message us on WhatsApp. It’s the quickest way to get in touch.
WhatsApp: 01256 578106
Send us a quick message with:
- Your name
- That you want a free tax call
- Roughly what your company turnover is
We’ll get back to you same day (usually within an hour) and get something booked in.
Honestly, what have you got to lose? Worst case, we have a chat and everything you’re doing is perfect. Best case, we show you how to save thousands of pounds every year.
Most people who come to us wish they’d done it years earlier. Don’t be the person who looks back in 5 years and thinks “I could have saved £15,000 if I’d just made that call.”
Message us now. Let’s see how much tax you’re overpaying.