Here, we are talking about tax year 2019/20. It totally depends on whether you are operating as a limited company or working through an Umbrella company. When you start contracting via your own company you will be liable for a number of business taxes. Let’s take a look at the taxes you pay when working through a limited company:
- Corporation tax: This is the most important tax liability that applies to all limited companies. All companies pay tax on their annual profits and the rate of corporation tax is the same for all companies. The current rate is 19% but will reduce to 17% by 2020. Each year, your accountant will fill in the corporation tax return (Form CT600) and submit it online. But the first step is to register with HMRC and if you have an accountant then the work is already done. The previous year’s tax should be paid within 9 months of company yearend date.
- Income Tax: Any salary you draw as a limited company director is subject to standard PAYE (Pay as your Earn) taxation. You will pay income tax on any income received above the personal allowance threshold (£12,500 in 2019/20), according to the tax bands you cover (at 20% – basic rate, 40% – higher rate and 45% – additional rate). Tax due must be paid either monthly or if the amounts are low, quarterly.
- Employees National Insurance: Working as a director means you are also an employee of the company and employees also pay Class 1 Primary NICs on their earnings. The rates are 12% between £166 and £962 per week, and 2% on earnings above £962 per week. NICs due must be paid either monthly or, if the amounts are low, quarterly.
- Employer's National Insurance: Your Company will be liable to pay Class 1 Secondary NICs on the salary you draw. The rate is 13.8% over £166 per week. Unlike employee NICs there is no upper limit for employer’s NICs. The company also pays Class 1A NIC at 13.8% on the benefits it pays you. Most contractors therefore may decide to pay themselves a low salary, sometimes below the NIC threshold, to minimize their exposure to both income tax and NICs.
- Dividend Tax: Dividends are payments made to the shareholders of the company. Contractors operating as a limited company are shareholders of their companies and pay themselves a mixture of salary and dividends - this allows them to save tax. Dividends are not tax free however they are taxed at lower rates. Current dividend allowance is £2,000. The tax you pay depends on which Income tax band you’re in - at 7.5% - basic rate, higher rate-32.5% and additional rate 38.1%. Add your income from dividends to your other taxable income to work out your tax band. You may pay tax at more than one rate.
Dividends that fall within your Personal Allowance do not count towards your dividend allowance.
- Value Added tax (VAT): When working through a company you are running a business and hence making a taxable supply for VAT purposes and need to charge VAT to your clients. Each quarter you will hence need to complete a VAT return, and submit it together with payment within one month and 7 days of the end of the quarterly period. The standard rate for VAT (which you charge to your client) is 20%. You must register for VAT if your annual turnover is £85,000 or more unless making an exempt supply.
- Other taxes: Others taxes may include Capital gains - if you release the reserves in your company via liquidation or sell your company.
- Umbrella Companies tax:
As an umbrella company employee, you are taxed in the same way as you were as a traditional employee with your last employer. Your entire income, after making allowances for the umbrella company fee, and any other deductions (expenses, pension contributions, for example), is subject to standard Paye As You Earn (PAYE) calculations, and you will pay National Insurance on your income.
Your umbrella provider will process your payroll on your behalf, and any deductions will be shown on the pay slip.
- Other Issues: Introduced in 2000, the Intermediaries Legislation (IR35) could have a significant effect on your income as a limited company contractor if your contract work is deemed to be one of ‘disguised employment’. Umbrella company contractors are not affected by the IR35 rules, as they are already taxed as employees.