Contractor Tax
If you operate as a contractor, also described as a freelancer, or perhaps interim manager, then you are more than likely operating through a limited company.
You raise invoices for the hours, days or projects you deliver and from this income you deduct legitimate expenses to arrive at your trading profits.
Being part of a limited company, these profits are subject to Corporation Tax.
Then any funds you withdraw from your company, in the form of salary or dividends, are classed as your personal income and subject to Income Tax and National Insurance.
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What taxes do contractors pay?
Corporation tax
Income tax
Pay As You Earn (PAYE)
Self assessment
National insurance
Class 1 NIC
Value Added Tax (VAT)
Corporation Tax
Corporation Tax is the tax limited companies pay on their profits. The current rate is 19%. For companies with taxable profits up to £1.5million the Corporation Tax must be paid 9 months and 1 day after the end of your accounting period (usually your financial year). Companies must file a Corporation Tax Return and submit this to HMRC each year, along with a copy of their Company’s accounts.
Income Tax
Income Tax is a tax you pay on your personal income. You pay Income Tax on income and benefits received from PAYE employment, pension income, interest on savings, profits made when self-employed, your share of partnership profits, on income from property rentals and dividends received from a limited company. How much Income Tax you pay depends on how much you earn above the Personal Allowance each year and how much of your income falls into each Tax Band. The personal allowance and tax rates are published in the Government’s annual Budget Report.
Pay As You Earn (PAYE)
Most people pay Income Tax through PAYE, where income is taxed at source. This means that your employer or pension provider calculates and deducts the Income Tax and National Insurance contributions required before your wages or pension are paid to you. Your tax code tells your employer how much to deduct and then what hits your bank account is yours to spend.
Self-Assessment
If your income is not taxed at source then you must complete a Self-Assessment Tax Return each year. This is where you combine all sources of income and calculate the Income Tax and National Insurance due to HMRC. The tax year runs from 6th April to 5th April and your Self-Assessment must be filed, with tax paid, by 31st January the following year. In some instances you will be required to make a Payment On Account, which is a payment of tax in advance, based on next year’s estimated income levels.
National Insurance
National Insurance contributions are paid to qualify for certain benefits and the State Pension. There are different types of National Insurance (known as ‘classes’). The type you pay depends on your employment status, how much you earn, and whether you have any gaps in your National Insurance record. The National Insurance thresholds and rates are published in the Government’s annual Budget Report.
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