If you’ve thought about contracting and starting up your own limited company, then you’ll find our guide to contractor tax useful. The limited company route is the most tax-efficient way of operating, but there’s a lot of information to take in.
Tax is a complicated subject, and there’s no getting away from it. However, this shouldn’t stop you from forming your own limited company, taking advantage of the range of tax benefits, and pursuing your goal of company ownership.
Limited Company Tax
Whilst discussing limited company tax, it’s important to recognise the company as one entity, and you as a separate entity.
All limited companies must pay Corporation Tax on their profits; the current rate of corporation tax is 19% (2020-21).
This means that if you invoice your client £100,000 excluding VAT over the year, and have expenses of £20,000, you will pay 19% on the remaining £80,000. The company’s corporation tax is due nine months and one day after the year-end.
Employer’s National Insurance Contributions
Your company will pay 13.8% on any salary you pay yourself over the threshold of £169 per week however there is no national insurance to pay on dividends. Working through your own limited company allows you the flexibility to structure your income in the most tax efficient manner.
If you work through an umbrella company, you will have to pay employee National Insurance (NI) of 12% and employers NI of 13.8%.
VAT (Value Added Tax)
As a contractor, you’ll more than likely be registered for VAT. You charge this on your invoices, at 20%.
Most contractors also apply and register for the Flat Rate VAT Scheme, which means you charge 20% but then repay at a lower rate. You are entitled to a discount of 1% during your first year in the scheme. One drawback of this scheme is that the difference you keep is considered a profit, therefore this is subject to Corporation Tax.
All you need to start a Limited Company
Discover all the intricacies of contracting through a limited company with our free downloadable guide.
What’s in the guide?
- Understanding legislation – what is IR35 and what could it mean for your business?
- Maximising your expenses – find out what business costs you can expense through your company.
- Making your business a success – a look at how to manage your time, market yourself and make your business a success.
Income Tax including PAYE
This can be a complicated subject, due to the ability to draw money from your company in two ways:
- Salary (as an employee)
- Dividends (as a shareholder)
Any income taken as salary beyond your personal tax allowance of £12,500 (2020-21) is taxed in the following ways:
- 20% on earnings between £12,500 and £37,500
- 40% on earnings between £37,501 and £150,000
- 45% on earnings above £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. By the time you hit £125,000, your personal allowance will have disappeared, meaning that your income between £100,000 and £125,000 will have been taxed at 60%.
Talk to a contractor tax specialist
If you have any questions about contracting or would like further tax advice, please contact us.
Employee’s National Insurance Contribution
Firstly, there is no NI on dividends. You’ll just pay NI on a salary which is 12% on anything you earn above £169 per week. After you earn £962 per week, you’ll pay a rate of 2% on anything above this limit.
Income Tax and NI are, along with VAT, payable quarterly. Your accountant will be able to advise you of these crucial dates. The breakdown is as follows:
- Corporation tax – payable nine months and one day after the year end
- VAT – payable quarterly
- Income Tax/NI – payable quarterly
- Personal tax (self-assessment): payable every 31stJanuary, with potential payments on account in January and July
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