Tax rules for contractors are one area you need to understand if you are going to start contracting via your own company. In this article we list the main business and individual taxes you will be liable for.
Every company has to pay a tax on any annual profits they make in any tax year. This is covered under Corporation Tax and applies to all businesses. Currently the rate is 19% but the Government has set a target of reducing this to 17% in theory by next year. With the current state of turmoil in the UK it is possible that this target will slip or be scrapped altogether.
As your accountant it would be pour role to complete your Corporation Tax return each year and to file that with HMRC. You have 9 months to pay this tax from the end of your business year. For example of you run your accounts to the end of March, you must pay any amount owing by the end of December or face a penalty and possible action against you by HMRC.
You are only required to register for VAT if your turnover is higher than £85,000 in a 12 month period. Most contractors register even if they don’t breach this threshold.
There are different schemes available such as the Flat Rate schemes and as your accountant we can advise which scheme would make sense for you. If you don’t have many expenses to claim back VAT on, the Flat Rate VAT Scheme may make sense for you for example.
VAT is generally calculated each quarter and under the Making Tax Digital programme is submitted electronically to HMRC. Payments of any VAT due are then made within approximately one month of the end of the tax period.
Employers’ National Insurance
Your company is your employer so it will have to pay Class 1 NICs for your salary. The current rate is 13.8%there is £3000 of relief available under the Employment Allowance scheme.
Employees National Insurance
As an employee you must also pay Class 1 NICs from your salary and this will be 12% on income above £162 and below £962 per week.
Both of these NIC contributions can be calculated by us on your behalf if we run your payroll system. We can also advise you on the most tax efficient way to take income from your contracting business.
You are most probably familiar with PAYE or “pay as you earn” income tax as anyone who is working will most likely have paid some income tax in this way.
Each year the Chancellor will review the tax threshold levels and adjust these as they see fit. Currently you pay no tax below £12500, 20% on anything above that but below £50,000 and then 40% above that. there are some additional rules for those lucky enough to earn above £100,000.
If you fall under IR35 rules dividends will not be relevant for you but if you do not then paying yourself via dividends is likely to be the most tax efficient way of taking income.
There are different tax rate for the levels of dividends you take and these have been made more costly in recent years as HMRC seeks to tax the increasing number of contractors taking payment in this manner.
The HMRC website gives details of the dividend tax rates.
Tax Rules for Contractors – Summary
As you can see there are a number of areas where tax must be calculated and either deducted on a PAYE basis or paid to specific deadlines. We work with a large number of contractors in the Manchester and Salford and would be happy to quote you for this work. We believe our rates are very competitive so please give us a call.