Contractor Tax
A plain English Limited Company Guide for Contractors
If you’ve thought about contracting and starting up your own Limited company, which any accountant will tell you is the most tax efficient route possible as it lends itself to good tax planning, but were always worried by how complicated the tax side was, then we hope you’ll find the following Contractors tax guide helpful. We doubt it will answer all your questions but hope it will help fill in a few gaps.
Sadly there’s no getting away from it, tax is quite complicated, however this shouldn’t stop you from forming your own limited company, taking advantage of the tax benefits and pursuing your goal of company ownership.
Limited Company Tax (tax rates based on April 2011)
Whilst discussing Limited company tax it’s best to see the company as one entity and you, an employee and owner of the company, as a separate entity. This may seem strange but it really is the best way to think, and will make it far easier to understand.
Corporation Tax
All limited companies have to pay Corporation Tax on their profits; the current rate for companies’ with profits under £300,000 is 20%.
This means if you invoice your client £100,000 excluding VAT over the year and have expenses which includes any salary you pay yourself of £20,000, you will pay 20% on £80,000. The company’s corporation tax is due nine months and one day after the year end, this is what accountants refer to as the ‘financial year’.
Employer's National Insurance Contributions
Your company will pay 13.8% on any salary you pay yourself over the threshold of £136.01 per week.
If you work through an umbrella company ‘you’ will have to pay employee NI of 12% and employers NI of 13.8%, this means you’ll pay 25.8% on your entire pay less expenses and threshold allowances.
VAT (Value Added Tax)
As a contractor you’ll more than likely be registered for VAT which is 20% (2011 Rate). You charge this on your invoices and then give the money to HM Revenue and Customs (essentially you act as a tax collector for the government).
Most contractors also apply and register for the Flat Rate VAT Scheme which means you charge out at one rate 20% but then only repay at a lower rate, IT contractors usually use 14.5% (plus you get a first years discount of 1% so will just pay back at 13.5%), with this being paid on the total gross invoice value and you keeping the difference; sadly this then counts as a profit and is taxed along with your corporation tax, but could still add up to thousands of pounds per year which goes towards your overall income for year.
Contractor Tax – personal taxes (tax rates based on April 2011)
Income Tax including PAYE
This does get a little complicated due to you taking money from your company both as dividends (as the owner) and as a salary (as employee).
This spans what accountants call the ‘Fiscal tax year’, so 6th April to 5th April and relates purely to your personal worldwide income.
Any income taken as salary beyond your personal tax allowance (£7,475) is taxed at 20% and then after the higher rate threshold (£35,000) will be taxed at 40% and 50% after £150,000.
It is also worth mentioning that once you earn beyond £100,000 your personal allowance will be reduced at a rate of £1 for every £2 of income until it is reduced to zero, so by the time you hit £114,950 your personal allowance will have disappeared, this effectively means that the £14,950 after £100k will have been taxed at 60%.
Special note for dividends - Up to the higher rate threshold (£35,000) the dividends will be subject to nil PAYE Income Tax and nil NI. Anything taken above this will be subject to 25% higher rate dividend tax on the net dividend drawn.
Employee's National Insurance Contribution
Firstly, there is no NI on dividends. You’ll just pay NI on salary which is 12% on anything you earn above £139.01 per week until you reach £817 per week and then you'll pay just 2%.
PAYE Income tax/NI is, along with VAT, payable quarterly but your accountant will be able to advise you of these crucial dates.
Although not quite rocket science the above is fairly complex, especially as all the allowances, thresholds and rates often change annually.
It simply breaks down as this
Company liabilities
Corporation tax – payable 9 months and 1 day after the year end
VAT – payable quarterly
PAYE/NI – payable quarterly
Personal liabilities
Personal tax (self-assessment) – payable every 31st January, with potential payments on account in January and July (sorry even this sounds complicated).
We hope the above helps, please don't let fear of tax stop you from following your business aims and goals, SJD the UK's largest accountants for contractors support over 11,000 limited company contractors and freelancer's all of whom felt nervous about tax, however with the support of a good specialist accountant there really isn't too much to worry about tax wise as they'll help shoulder the burden.
If you have any questions about contracting or would like further tax and Limited Company advice please contact our New Enquiries Helpdesk on 0500 152500 / 01442 275789 or email nikki.hanlon@sjdaccountancy.com.
SJD Accountancy
SJD Accountancy are the UK's largest specialist provider of fixed fee, limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 11,000 clients.
We are the only National specialist firm of accountants with offices in all major UK cities so you’ll never be far from your accountant. SJD also have more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. You’ll also be pleased to know that we are one of the lowest priced as well.
Free face-to-face meetings. This is another unique service, only SJD offers free face to face meetings - tax is complicated and sometimes only a meeting will do.
Unlimited access to your own dedicated accountant. No call centres, no outsourcing, no automated call handling. Simply telephone, e-mail or meet your own dedicated accountant face to face.
Money back service guarantee. All your telephone calls and e-mails will be answered the same day or we will refund your monthly fee's.
Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.
All inclusive low cost monthly package which includes completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant and all company returns. All this for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market.
If you have any question about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: nikki.hanlon@sjdaccountancy.com.
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
You may also find the following pages, guides and case studies useful:
Take home pay calculator - How much could you be taking home
Contractor FAQ - All your frequently asked questions and their answers
First time Contracting or Freelancing? - A summary of the alternatives along with pros and cons
Choosing an accountant - For a full review
Step-by-step Guide to Contracting - Download a FREE copy of our guide
Limited or Umbrella? Can't decide? - We help you decide which is best for you
Guide to Contracting - All the best guides to contracting in one place
Expenses Guide - Know exactly what you can claim
Umbrella company guide - Everything you ever wanted to know about umbrella company services
IR35 Guide - A great plain English guide to IR35
