When you start your own company as a contractor, you are liable to pay various business taxes. It is important that you must possess good knowledge about the various taxes which you need to pay as a professional contractor.
- Corporation tax
- Value added tax
- Employer’s National insurance
- Employees National insurance
- Income tax
- Dividend tax
- Other taxes
Corporation tax: - Tax paid on annual profits is known as corporation tax. It is mandatory for every company to pay corporation tax on their annual profits. In previous years, companies were following separate small profits corporate tax rates but now companies have to follow the same corporation tax rate of 19%.
When you form a company, it is your responsibility to inform HMRC about your limited company incorporation (unless it is already active or any payment you have done for corporation tax before)
Kindly make sure that your accountant must file your corporation tax return via form CT600 online to HMRC.
Deadline for filing corporation tax return
The deadline for filing corporation tax return is 12 months after the end of the accounting period. You need to face penalty from HMRC in case you miss the deadline.
Deadline for paying corporation tax
You must pay your corporation tax bill within 9 months and one day after the end of the accounting period.Penalties for late filing of company tax return
Time period after the deadline Penalty amount 1 day £100 3 months Another £100 6 months Penalty of 10% of unpaid tax after estimation of your corporation tax bill by HMRC 12 months Another 10% penalty of any unpaid tax
If 3 months late
In case you are 3 months late in filing your tax return in a row, penalty of £100 will increase to £500 each.
If 6 months late
In case you are 6 months late in filing your tax return, HMRC will write and tell you the amount of corporation tax they think you need to pay. This procedure is also called tax determination. Amount of interest and penalties are recalculated by HMRC to ascertain the amount you need to pay.
Value added tax: - Most of the contractors go for VAT registration as they don’t want to breach the specified annual limit of £85000. There are various schemes in which you can register as a contractor depending upon your circumstances – Standard VAT scheme, Flat rate scheme etc.
Flat rate scheme is considered if you are not expecting large amount of expenses to reclaim as a contractor. In the flat rate scheme, you just need to apply flat percentage to your turnover i.e. 14.5% for most of the contractors. You will also be able to avail the benefit of 1% discount on the flat rate in the first year which takes your rate down to 13.5%.
Previously in the year 2017, companies having fewer expenses were paying higher percentage of 16.5% which reduces the attractiveness of the flat rate scheme at that time.
It is mandatory for you and your accountant to file VAT return quarterly as well as payment within one month after the end of the quarterly period.
Employer’s national insurance: - Employers of limited companies need to pay class 1 NIC’s on payment of salaries made to employees. It is mandatory for employer to pay 13.8% on employees salaries or above £169 weekly i.e. £8788 annually.
When your company (Not having sole director-employee) fulfils various requirements, you can avail the benefit of employment allowance and reclaim up to £4000 employer’s national insurance contribution (NIC) annually. However, many of the contractors having less information or less knowledge of taxation system not able to reclaim the maximum amount of expenses and NIC that they are eligible for. In order to know more about NIC rates & categories, click on https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions
Employees national insurance: - Employees including the directors of limited company need to pay Class 1 national insurance contribution (NIC) on their salaries or earnings to HMRC for which the rates are given below –
Income range (per week) Class 1 NIC rates Up to £183 - £183 - £962 12% Above £962 2%
For ex – If you are earning £1000 weekly, you will pay NIC of –
a. Nothing on first £183
b. 12% on earnings between £183 - £962 = 93.48
c. 2% on earnings above £962 = 0.76
d. Total NIC contribution = £93.48 + £0.76 = £94.24
In order to know more about NIC rates & categories, click on https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions
Income tax: - Every employee including limited company director is liable to pay standard PAYE taxation. Any income you are receiving above the specified personal allowance threshold of £12500 (updated 2020/21) needs to pay income tax at basic rate of 20%, higher rate of 40% and additional rate of 45%.Income tax rates & bands
Band Taxable income Tax rate Personal allowance Up to £12500 0% Basic rate £12501 - £50000 20% Higher rate £50001 - £150000 40% Additional rate Above £150000 45%
Income tax payment made by an employee depends upon the following factors –
a. How much income you are earning.
b. How much of your income falling in each tax band.
Dividend tax: - Dividend tax is a tax paid on the dividend payment received for holding shares in a company. You don’t have to pay tax on your dividend income if the amount you earned is less than the dividend allowance of £2000. You are only liable to pay tax when your total dividend income is above dividend allowance. The rules were different for dividend allowance before 6th April 2016.Total Dividend tax paid above dividend allowance depends upon the category of income tax band in which you are falling into –
Tax band Tax rate on dividend above allowance Basic rate 7.5% Higher rate 32.5% Additional rate 38.1%
In order to find out that in which tax band you will fall, add your dividend income to the other income.
In case you are earning up to £10000 as dividends:-
a. Contact HMRC helpline.
b. Ask HMRC to change your tax code.
c. Mention in your self-assessment return.
Note – No need to tell HMRC in case your dividend income is less than the specified dividend allowance for a relevant tax year.
In case you are earning above £10000 as dividends:-
a. Mention in your self-assessment tax return.
b. In case you generally don’t send tax return to HMRC, register by 5th October following the tax year in which you have received the dividend income.
c. You will receive a letter from HMRC telling what you need to do next after registration.
Note – There is a change in the dividend tax system in April 2016 due to which contractor faces a tax hike due to some extent and needs to pay more.
Other taxes: - Other taxes include capital gains tax which a contractor needs to pay on profit earned on disposing of an asset annually. Some assets are also tax free and you don’t have to pay capital gain in case amount of profit you earned falls under the category of tax free allowance.
You need to pay capital gains tax in the following cases –
a. Selling of asset.
b. Transferring of asset to any other person.
c. Giving asset to somebody as a gift.
d. Received compensation on lost or destruction of an asset.
e. Even if you sell your company sometime in future and realise a profit.
In case you want more information or advice on limited company tax basics for professional contractors, kindly call us on 03330886686 or you can also e-mail us at email@example.com