Contractor Tax

(3 minutes to read)

The saying goes 'there are only two certainties in life – death and taxes'. When it comes to tax, it can often seem like a minefield of complex rules, thresholds and deductions from your hard earned money.

There is no getting away from it – tax in the UK is complicated. However, this guide aims to break down the deductions you can expect to see from your pay as a contractor and hopefully give you a fuller understanding of what’s going on with your money.

First, we will break down how tax works through an Umbrella Company – often the first destination for a contractor and certainly the easiest. Next, we will touch on how tax is handled through a Limited Company. Being paid through a Limited Company tends to be the most tax efficient way to be paid, although this depends on your personal circumstances – see our Umbrella vs. Limited guide to see which is best for you.

Tax through a Limited Company

This is a little more complicated, since your Limited Company will pay you both a salary – as an employee – and dividends – as a shareholder. It is also required to pay Corporation Tax on its profits. Managing the different thresholds and tax rates for optimum tax efficiency is one of the main reasons you pay a specialist contractor accountant, like Dolan Accountancy!

Salary is calculated as above. It is extremely common to be paid a salary which falls below the 0% income tax threshold, with minimal or no National Insurance being due.

Corporation Tax is paid at 19% on all profits a company makes. Profits are the income of a company, minus salary paid and any expenses incurred in running the business (for more information on tax-exempt business expenses, see our contractor expenses guide).

VAT is charged on all invoices you issue for services and goods provided. This is a fixed rate of 20%. Contractors are usually registered on the Flat Rate VAT Scheme, which means that you charge VAT at 20% on your net invoices, but only repay it at 16.5% on your gross invoices. The difference is counted as profit for the purposes of Corporation Tax, but usually still adds up to a net saving.

Dividend Tax is payable personally on profits paid to you as dividends, from your Limited Company. There is a £5,000 tax free threshold for dividends, no matter your total income. Dividends that fall into the lower rate are taxed at 7.5%; 32.5% for dividends in the higher rate and 38.1% for dividends in the additional rate.

The different forms of taxation related to a Limited Company can be complicated and interact with each other in different ways. Don’t be afraid of the different terminology! Drawing money from a Limited Company in the most tax-efficient manner is the bread and butter for any good contractor accountant.

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Tax through an Umbrella Company

Umbrella taxes are handled through PAYE – the UK’s pay-as-you-earn income tax system, used for permanent and salaried employees. There are also National Insurances to be paid. All figures are correct as of 2017-18.

Employer’s National Insurance: Before an employee can be paid, the employer – in this case the Umbrella Company – has to pay Employer’s NI. As of 2017-18, this is 13.8% of all income above £157 a week.

Employee’s National Insurance: Once money is paid to you, you pay 12% of all income over £157 a week, as National Insurance. This means that 25.8% of all income earned will be paid to HMRC for National Insurances.

Income Tax: Income Tax is based on annual thresholds. No tax is applied to income below £11,500. 20% tax is applied to the next £33,500 of income and 40% tax is applied to income above this. If you earn more than £150,000, 45% tax is applied.

As an employer, the Umbrella Company is also liable for additional taxes such as the Apprenticeship Levy, which all businesses must pay when making payment to an employee.

For a personalised illustration of your take-home pay, making best use of your various tax allowances and thresholds, give one of our specialist contractor accountants a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.

Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, ContractorUmbrella, it means we can offer one low cost, fixed fee package at £95 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of ContractorUmbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, ContractorUmbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use CashPlus free of charge for the first year, saving you £69.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.

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