Contractors and freelancers are an under-advised population. The information gap is filled by online forums, the bloke at the networking event, and confidently-wrong YouTube videos. We see the consequences on the desk every January — and again the following October when HMRC corrects them with interest and penalties attached.
Here are the five myths we hear most often.
Myth 1: "I can claim 100% of my mobile phone bill"
Only if the contract is in your business's name. If the contract is personal and you use the phone for business, HMRC allows the additional business cost — typically a sensible apportionment of the bundle if the business use is significant, and pure call/data charges that are demonstrably business.
The cleanest fix is to put the contract in the company name, where the entire cost is deductible and there is no benefit-in-kind on private use (one of the few exemptions in the BIK rules). For sole traders the apportionment approach remains.
Myth 2: "I can pay myself in dividends only and skip salary"
Technically yes. Practically, a disaster. Drawing zero salary means zero qualifying year for State Pension and zero NI credits for benefits that depend on NI record. The marginal tax saving versus a small salary at the lower earnings limit is tiny; the long-term cost is real.
The standard approach for owner-directors is a salary pitched between the lower earnings limit (qualifying NI year) and the secondary threshold (no employer NI), with the remainder taken as dividends within the basic rate band where possible. The exact figures shift annually — verify against the current year's thresholds.
Myth 3: "Working from home means I can claim a chunk of my mortgage"
You can claim a reasonable proportion of running costs — heat, light, broadband, council tax — based on the proportion of the home used exclusively for business. You cannot claim mortgage capital repayments. You can claim mortgage interest as part of the apportionment for self-employed traders, but with a serious capital gains tax consideration: a room used exclusively for business loses its share of Private Residence Relief on sale.
For most contractors, the £6 per week (£312 a year) HMRC simplified allowance is not worth the paperwork to beat. For high-property-value cases the analysis is worth doing properly.
Myth 4: "If I don't withdraw it, I don't owe tax on it"
For a limited company, profits are taxed at corporation tax level regardless of whether you take them out. For dividends, the tax point is the date the dividend is declared, not the date it hits your personal bank account. Leaving declared dividends in the company as a director's loan does not defer the personal tax — it just creates a paperwork mess.
Money the company has earned but not declared as a dividend is genuinely deferred at personal level. Money you have voted to yourself as a dividend is your money the moment the vote happens, even if the cash sits in the company.
Myth 5: "IR35 doesn't apply to me because I have my own limited company"
This was always wrong and is more wrong now. Since April 2021 (medium/large private sector clients) and 2017 (public sector), responsibility for IR35 status determination sits with the end client, not the contractor. If the client determines that the engagement is "inside IR35", PAYE is deducted before the money reaches your company. Owning a limited company changes nothing about the determination.
The status test is about how the work is done — substitution, control, mutuality of obligation, financial risk, integration — not what corporate vehicle you invoice through.
Bonus myth: "January 31st is when I should start"
The deadline is January 31st. The work should start in May. You have nine months from the end of the tax year to file. Doing it in May means:
- You know your tax bill by June and can plan cashflow
- You spot errors with eight months of correction window, not eight days
- You can defer payment without panic if your accountant has structured a Time to Pay arrangement well in advance
- You stay off HMRC's "left it to the wire" lists, which correlate with enquiry selection
Where to start
If you have read this and recognised even one of the myths in your own affairs, it is worth a proper review. Our self assessment service handles contractors and sole traders end-to-end — including the proactive tax planning that turns next January into an admin exercise rather than a panic. For limited-company contractors who also need the corporation tax side handled, we package both together — see tax planning for the full picture.
Book a 30-minute call and we will tell you within the call whether your current setup is optimal or wasting money.