If you are an oil and gas contractor, your setup may be costing you more in tax than you realise. How do I know that? Because I see it all the time. And it is rarely down to mistakes you have made. More often, it comes down to how the business was set up and how it has been run over time.
The problem
Many contractors I work with start out using a limited company that was set up quickly, often based on generic advice they received at the time. It works fine, but it is often not the best way to structure your business.
The most common issues I see include:
- Income taken inefficiently between salary and dividends
- Expenses either underclaimed or incorrectly claimed
- No clear planning around periods of downtime between contracts
- Confusion around overseas work and tax residency
- Pension contributions used poorly, or worse still, ignored completely
- Profits left sitting idle in the company, often leading to higher tax later on
On their own, these might not seem like big mistakes. But over the course of a year, they can mean thousands of pounds lost unnecessarily.
Where tax leakage happens
The real issue is not any one decision, it is that everything is being done without a clear, joined up plan. For example, you might:
- Take a low salary and high dividends, without considering changes in dividend tax rates
- Leave profits in the company but then extract them later at higher tax rates
- Miss the opportunity to smooth income across tax years
The solution
Thankfully, the fix is not complicated, and it is something I deal with all the time for contractor clients.
1. Plan income across the full year, not just month to month
With rare exception, oil and gas work is not consistent. You likely have periods of intense work and earnings followed by gaps.
Instead of reacting to income as it arrives, map out:
- Expected contract periods
- Likely downtime
- Total annual income range
From there, you can decide how much to take as salary, how much as dividends, and when. This avoids spikes that push you into higher tax bands unnecessarily.
2. Use your company properly
Your limited company gives you options that most contractors only use a fraction of.
Consider:
- Pension contributions directly from the company, which reduce corporation tax
- Timing dividend payments across tax years
- Retaining profits for future lower tax extraction
Used properly, your company can reduce your overall tax rate quite significantly.
3. Get clarity on overseas work
If you work offshore or internationally, this is one of the most misunderstood areas, for contractors and accountants! Getting this wrong can either mean overpaying tax, or worse, facing unexpected liabilities later. So, make sure you engage with an specialist accountant.
4. Claim expenses properly
I often see a big gap in how contractors approach expenses, with some being overly cautious while others go too far the other way.
These are the most common areas to review:
- Travel and accommodation for offshore work
- Training and certifications
- Equipment and tools
- Professional subscriptions
When done properly, this is one of the simplest ways to reduce your tax bill.
5. Think beyond the current contract
A common pattern is to focus only on the current role.
However, better results will come from asking yourself:
- What will my income look like over the next two to three years?
- Do I plan to step back from the business soon?
- When do I want to extract larger amounts from the company?
A simple test
When I first speak to an oil and gas contractor, I will usually ask a few simple questions. If they cannot clearly answer them, I know that there is often money being lost. So, ask yourself:
- Why am I taking this level of salary and dividends?
- What is my expected total tax bill this year?
- How much profit is sitting in my company and why?
- Am I using pensions strategically, or not at all?
If you’re unsure, or if your answers are vague, your structure is probably not working as well as it could.
How I can help
Most oil and gas contractors are very skilled in their field. Unfortunately, the financial side of their business is often left to just “what seems to work”.
That is where I often see mistakes or, at the very least, where inefficiencies creep in.
If you want to check your current setup or see where you might be losing money unnecessarily, I’m always happy to have a chat. Book a free call with me or call 07866 465 223, and we can look at how you are set up, what you are claiming, and where things could be improved so you keep more of what you earn.