Tax Planning For Contractors (Benefits And How To Get Started)
Good tax planning, which need not be complex, helps you achieve your financial goals and plan for upcoming life events.
In this feature, co-owner and director of Tax at Fenero, David O’Reilly, covers tax planning for contractors or anyone thinking of becoming a contractor.
David is an Accountant and Chartered Tax Advisor with the Irish Taxation Institute and specialises in helping contractors with their tax and financial needs.
His significant experience includes advising contractors on the tax planning opportunities that contracting offers compared to permanent employment, for increasing wealth as well as increasing income.
Additionally, David has significant experience and expertise in advising contractors who operate in Ireland through non-Irish limited companies, to be compliant whilst maximising their retention.
What is Tax Planning?
“Tax planning is simply looking at your financial and life plans from a tax efficiency perspective.
Tax can be expensive so it’s worthwhile making sure you are not paying too much. If you pay income tax at the higher rate or possibly face a tax liability in the future, taking some time to do a tax plan can reap significant rewards.
Due to the nature of contracting, professional contractors generally have more scope to benefit from tax planning compared to permanent employees as they operate through a Limited Company.”
What is the main objective of tax planning?
“The main objective of tax planning for most people is to legitimately reduce the tax they pay through allowable reliefs, deferrals, or deductions; however this is not the sole objective.
Through tax planning, you can better achieve your financial goals and plan for upcoming needs.”
What are the benefits of tax planning?
“Good tax planning, which need not be complex, helps you achieve your financial goals and plan for upcoming life events.
Each person’s needs will differ from a tax planning perspective; some will favour generating wealth while others may prioritise creating an income stream for retirement or estate planning.
Taking the time to plan for the future can reap many benefits some of which are summarised below:
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Pay Less Tax
An obvious benefit is reducing the tax you pay. The most common taxes impacting contractors include Income Tax, Capital Acquisitions Tax (CAT), Capital Gains Tax (CGT), and Corporation Tax.
Professional Contractors can better reduce the taxes they incur when they match their contracting career plans with tax planning.
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Generate higher returns
Effective tax planning can result in a greater return on your investments. An example of this is making investments through a company rather than personally. Companies, in general, pay a lower rate of tax compared to individuals which can allow for greater reinvestment of profits resulting in higher overall returns.
Consideration of potential taxes extracting profits from a company needs to be factored into the overall plan.
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Provide for Retirement
Pensions are an excellent way of reducing the tax you pay now while building wealth for your retirement.
Done correctly, tax planning can enable an earlier retirement age through a deferral and reduction of tax payable. In general, Contractors can avail of higher tax relief on pension contributions compared to the options open to permanent employees.
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Better transfer of assets to family members
Through planning, it is possible to set up structures to reduce inheritance or gift tax resulting in more to pass on to your family.
These structures are available to contractors and permanent employees alike and range from availing of the €3,000 annual Gift Tax exemption to taking out an insurance policy to settle future inheritance tax liabilities for your children.
As an example, you can give any person €3,000 tax-free each year. This means two parents can give a child €6,000 (i.e. €3k x 2) each year. Over 25 years, this equates to €150,000 tax-free and a possible sizable deposit to purchase a property for that child.”
What are the different types of tax planning?
“There are many ways of approaching tax planning. A common way for contractors is preparing a tax plan based on how long they intend their work as a contractor.
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Short Term
The focus of short-term tax planning is to utilise reliefs and deductions available in the current tax year. Due to their flexibility and ease of use, many contractors opt to use an Umbrella Company if they plan to contract for less than 12 months. Claiming business expenses and maximising reliefs such as pension contributions gives the highest savings for short term planning.
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Longer-term tax planning
A wider array of tax planning options become available to contractors who are willing to commit to contracting for 3 years or more. These individuals are in general better off setting up a Personal Service Company (PSC) to carry out contracting.
The best type of tax plan is a holistic tax plan ensuring needs are met today and in the future.”
Where can contractors make cost efficiencies?
“Contracting offers unique opportunities compared to permanent employment when it comes to tax planning. The higher income earning potential contracting offers is a factor, however, more so is the corporate structure Professional Contractors operate through.
Contractors who set up Personal Service Companies (PSCs) to provide their services have access to a much wider range of tax planning opportunities (compared to those who use Umbrella Companies).
The longer a person plans to work as a contractor, the greater the tax planning opportunities become available. Maximum benefits are achieved when these tax planning opportunities are aligned with the contractor’s career plan and length of time contracting.”
How to get started
“Choosing the right solution at the outset to carry out the contract is critical. In terms of timings, it’s possible to get set up in less than one hour under an Umbrella Company whereas setting up a Personal Service Company (PSC) can take several weeks before it is fully set up and ready to use.
Factors such as the potential contract income, level of income required for day-to-day living and length of time intending to contract, all need to be considered. A directional tax plan is then created focusing on maximising the allowable reliefs and structures based on the person’s contract career intentions and life circumstances.”
“Speak to an expert from the outset for help determining what tax planning opportunities may be open to you based on your circumstances, to guide you in your choice between an Umbrella Company or a PSC solution.
At Fenero, we specialise in helping professionals maximise their income and wealth-building opportunities through contracting. Whether they are thinking about contracting for the first time or are an experienced career contractor, we can give tailored advice on the reliefs and tax planning opportunities available based on their specific circumstances and contracting career plan.”
Find out more
To find out more, get in touch with David and the team at Fenero using the details below:
Telephone: 01 6877400
Or email: hello@fenero.ie
Their consultants will be able to provide you with tailored tax advice based on existing contracting career plans or help you shape your future plans.