11 Nov

Contractor tax: limited company and personal taxes explained 

As a contractor, we know it can be hard to keep on top of your finances. That’s why we’ve created this easy to understand outline of contractor tax, looking at limited company and personal taxes. Keep reading to find out more! 

What is contractor tax? 

In a nutshell, when you contract via your own limited company, your contractor tax will come in two different forms – some of which is personal, and some of which is through your company. If you work for a client through an intermediary, you’ll need to pay about 25% more in tax if you are caught within IR35 (intermediaries legislation). Mazuma are experts in this area and can ultimately save you time and money in dealing with it - get in touch today to find out more!

Here’s a simple breakdown of limited company taxes: 

Corporation Tax 

This is due 9 months after year end. All limited companies are subject to Corporation Tax, currently at 19% (2019/20).  

If your contract is caught by IR35, it’s likely that your own earnings and overheads will be equivalent to the company’s income. As this means that the company has made little net profit, little (if any) corporation tax will be due. 

But if your contract is not caught by IR35, you will probably have a low salary with high dividends. Dividends can only be paid from profits and so corporation tax at 19% of net company profit will be due. 

Employer's National Insurance Contributions (NICs) 

These are paid monthly. They’re calculated as a company cost at a rate of 13.8% of gross salary.   

If your contract is caught by IR35, then you’ll have a resultant high salary. The amount of Employer’s National Insurance will be calculated on the IR35 salary. 

However, if your contract is not caught by IR35, then it makes sense to draw a low salary. This may result in avoiding Employer’s National Insurance contributions. It’s also worth noting that no National Insurance Contributions can be charged on company dividends. 

VAT (Value Added Tax) 

The company needs to collect this money and account it to HMRC every quarter. You can claim input VAT on your company’s purchases as deductions when paying HMRC. 

So as to be properly prepared for this, you’ll need to include 20% VAT on your invoices to clients. In some cases, where it’s possible to claim under the ‘flat rate scheme for small businesses’, companies can reduce their payments. 

If dealing with all this sounds time consuming – that’s because it is! Our friendly team here at Mazuma can deal with your tax, giving you valuable time to deal with your business. 

Personal Taxes 

Income Tax 

You will pay this every month. Those working in an IR35 caught contract will have PAYE on their full income. This will be deducted at source. Those not working in an IR35 caught contract will have a small amount of Income Tax deducted through PAYE. 

Those on IR35 exempt contracts receive dividends taxed in bands that align with the income tax bands. The current 2019/20 rates are 7.5%, 32.5%, and 38.1%.  

Employee's National Insurance Contribution 

Employee's National Insurance Contributions are paid monthly. They apply to everyone with contracts caught by IR35. 

But those not caught by IR35 will pay very little, if any, Employee’s National Insurance contributions. For them, most income will be taken by dividends and these do not attract any National Insurance Contributions. 

Capital Gains Tax 

When you close your company, you may need to pay Capital Gains Tax. However, it may be possible to reduce the capital gain, and hence the tax, by applying for exemptions and reliefs. 

For more information, head over to our resources.

Speak to Mazuma

Chances are, if you’re reading this, then you’re looking to find simple information, or low cost, efficient accountancy services. Mazuma can help with both. We’re an online accountancy firm who take the stress and hassle of dealing with accountancy clean away! Contact us today for a free quote - we can’t wait to hear from you! 

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