Limited company tax UK and contractor taxation

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Introduction 

This guide looks at UK contractor taxation for an independent contractor. When you run your own company, there are different business taxes. In this guide, we’ll research what tax a limited company pays and consider contractor taxes. We’ll investigate taxes for a new Ltd (UK) company. This includes what taxes contractors pay and how much tax contractors pay (UK). When contracting, professionals should plan for contractor limited company tax and minimise the tax for contractors wherever possible. Many limited company contractors ask their accountants, `what tax am I liable for as a Ltd company’? Indeed, suppose your business structure is that of a UK contracting professional with a limited company instead of being an employee or working through an umbrella company. You’ll have limited company tax (UK) responsibilities, including business taxes.

As a company director, you have various duties and responsibilities when running a UK limited company. These include routine filings with Companies House and HMRC, being aware of UK tax legislation, and paying any UK limited company tax. You must also deal with ltd taxes (UK) throughout the company year for any self-employed contractor taxes. Therefore, this guide will detail how tax for contractors (UK) works. Furthermore, we’ll research the main types of UK Ltd taxes.

When you contract through your own company, you have many different things to deal with daily. This includes any limited company tax (UK) and annual accounts responsibilities. If you’re an IT contractor, as many are, you must stay on top of your IT contractor tax responsibilities. On the other hand, when working through an umbrella company, all financial and administrative duties are dealt with on your behalf.

Initial thoughts on limited company contractor taxation 

First thoughts on independent contractor taxes (UK)

When you run a UK contracting company, what tax does a limited company pay throughout the year? There are various tax rates and allowances against different UK contractor company taxes. In this guide, we’ll explain what contractor limited company tax (UK) is. In addition, we’ll cover what limited company contractor taxes most contractors pay through their business and how these apply.

UK companies have limited liability status. This refers to the extent to which a company director or shareholder is responsible for the company’s debts. The most common type of company is a private limited company, which most contractors and small business owners choose.

Common questions

Some often-asked questions in respect of private contractor taxes include:

  • Do contractors pay tax?
  • Do contractors pay less tax?
  • As a contractor, how much tax do I pay?
  • How contractors pay taxes.
  • What tax do contractors pay?
  • How much tax do I pay as a contractor?
  • As a contractor, when do I pay tax?
  • How can you minimise the tax on contractors?

This guide will examine the above and discover how taxes work for UK limited companies.

What tax does a limited company pay?

This tax guide for UK contractors is a helpful overview if you’re about to set up your company for the first time. When we consider what contractor limited company taxes your business may pay, what are they? There are three main types of taxes for limited companies (UK) and UK contractor tax. However, your UK company taxes as a contractor won’t include all of these if it doesn’t register for either VAT or PAYE.

  • Corporation Tax -payable on company profits once per year.
  • VAT -payable quarterly or monthly if you so choose.
  • PAYE/NIC payable on salaries quarterly or monthly if you don’t meet the quarterly qualifying limit.

Further initial thoughts on contractor tax (UK) 

What are some top tips to reduce limited company contractor taxation?

When you’re a UK contractor running a limited company, there are various ways to improve things for yourself. As part of this, there are tax planning opportunities which can help you minimise your exposure to contractor limited company taxation (UK). These tips for minimising how much tax you pay as a contractor include:

  • Look at ways to maximise your contractor take-home pay.
  • Negotiating the best rate for your work.
  • Ensure you don’t pay more tax than is necessary.

Indeed, one factor affecting how much tax a contractor pays is their earnings. However, working and operating your company tax-efficiently can help minimise your exposure when you start paying taxes as a contractor.

Two separate legal entities

When you’re a contractor running your own company, the individual (you) and your company are separate legal entities. Indeed, this is how it is in the eyes of the law. What’s more, your company’s money isn’t directly yours. Therefore, you shouldn’t treat the company’s bank account as such. Keeping track of your company’s finances as time passes is essential. Furthermore, when it comes to taxes for your business, you mustn’t find yourself in a position where your company can’t pay its UK contractor taxes.

Your company pays limited company tax on its profits as a UK business. On the other hand, as an individual, you’ll pay contractor income tax (and possibly NI) on your personal income. This will include the income you receive from your company and other sources. Therefore, when paying tax as a contractor (UK), limited company taxation applies to UK companies, and personal taxation (UK) applies to individuals subject to UK personal tax.

UK contractor taxation filing dates

Before reading the below, we’ve detailed all relevant filing dates. This will show you how to keep track of taxes as a contractor. You may have to meet these dates as a company director and someone who files a Self-Assessment Tax Return. Making diary notes to track which dates require meeting each year is a good idea.

Furthermore, when you own your own company, one of the main responsibilities is filing annual company accounts. A good accountant will handle this and any tax requirements for contractors. They’ll look after the filing of official documents and let you know when to make a payment for a limited company tax liability.

Limited company tax explained for contractors 

Contractor taxation -Corporation Tax (CT) 

Initial thoughts on CT 

The first type of UK limited company tax when paying taxes as an independent contractor is Corporation Tax. Limited companies pay Corporation Tax for each accounting period they prepare accounts for. This is payable by every company that makes a profit every 12 months. Therefore, when we consider Ltd company taxes explained, CT is the main tax within your business taxes.

As mentioned, CT is the principal tax for your company out of your taxes as a contractor. Therefore, claiming all your genuine business expenses each year makes sense. This includes both rechargeable expenses to your client and non-rechargeable ones. Expenses help to lower your company’s profit. Therefore, they give tax relief, which, in turn, reduces your company’s overall contractor Corporation Tax bill.

Salaries are regarded as business expenses, and these reduce CT. Therefore, from the outset, you should consider your salary level. In addition, you could consider employing your spouse if they will be helping you run your company.

When we consider what tax your contractor company pays, CT is the main tax for a limited company (UK). Each year, your company pays CT on its taxable profits over to HMRC. In addition, each company must have a financial year-end for filing and tax reasons. Therefore, if your company’s year-end is 30 June 2024, it would pay CT on its profits for the year to 30 June 2024.

Corporation tax further details (part 1)

Regarding Corporation Tax, the UK limited company tax rate was 19%, and up to 31 March 2023, all companies paid this Corporation Tax rate on their profits. This is a tax for contractors running their own UK limited company. It is the main contractor limited company tax, and as mentioned, all UK companies pay this on any profits they make each year.

In previous years, large companies paid a higher rate of CT than smaller companies. 1 April 2015 was the date HMRC lined up the rates for small and large companies. However, following the March 2021 Budget, the Chancellor confirmed an increase in the Corporation Tax (CT) rate. Furthermore, this increased from 19 to 25 per cent from 1 April 2023. The 25% rate applies to profits above £50,000 with marginal relief for profits up to £250,000. Therefore, this means:

  • Profits up to £50,000 will incur Corporation Tax at 19%.
  • Company profits between £50,000 and £250,000 will incur 19% on the first £50,000 and a marginal rate (about 26%) on the remainder.
  • Profits above £250,000 will incur 25% on all the profits. 

Corporation tax further details (part 2)

Once you register your company with Companies House, HM Revenue & Customs (HMRC) will register it for CT. CT payments are due nine months and one day after a company’s year-end. Therefore, in the example of your year-end being 30 June 2024, the CT would be due for payment to HMRC by 1 April 2025.

Your company might make gains when you sell any company assets such as stock, shares, property, etc. Capital Gains Tax is payable on the gain when you sell or ‘dispose of’ an ‘asset’ that increased in value. Therefore, the gain is taxable, not the money you receive. When a company makes gains, these are taxable at the same rate as CT. The tax is payable to HMRC as part of the company’s overall CT bill.

Contractor taxation -Value Added Tax (VAT) 

VAT for contractors 

When we look at limited company taxation (UK), another main tax for contractors is VAT. Most UK contractors will register for VAT. Registering for VAT is compulsory if your annual turnover is over £90,000 (£85,000 up to 31 March 2024). However, you can register voluntarily if your turnover is under this.

When you’re a VAT-registered business, you’ll charge VAT at the current standard rate of 20% on your services or charges. The VAT you receive from clients and customers is, in effect, paid over to HMRC each quarter.

If you operate under the `normal VAT scheme,’ you can recover any VAT you incur on your costs and expenses. Any VAT you pay to suppliers is effectively reclaimable from HMRC each quarter. What’s more, you can operate under the Flat Rate VAT scheme. However, this is now less attractive for contractors due to the limited cost trader rule.

The VAT reporting process

You report the overall VAT to HMRC on quarterly VAT returns. The net difference between the VAT you charge on services and the VAT you pay out on costs and expenses is payable to HMRC. If you’re due something back, HMRC will refund it.

You can now submit VAT returns online through a compatible software provider under the new Making Tax Digital rules.

VAT payments are due one month and seven days after the end of the VAT quarter. If you’re paying by direct debit, you have an extra three days before the VAT payment goes through, i.e., it will go through one month and ten days after the end of the VAT quarter. Therefore, if your VAT quarter ended on 30 September 2024, the due date for filing the return and paying the liability by internet transfer would be 7 November. HMRC will take the liability on 10 November if you pay by direct debit.

Contractor taxation -PAYE/National Insurance contributions (NICs) on salaries 

Another tax for Ltd (UK) and the third type of contracting tax is PAYE/NIC.

PAYE / National Insurance (NI) is part of your limited company taxation and is payable to HMRC based on any salaries a business pays its employees. The employee will initially earn tax-free pay, but depending on their earnings, income tax and employee National Insurance may be deducted. Depending on the pay level, the employer may also have to account for and pay over the employer’s National Insurance.

The sum of the three amounts (PAYE income tax, employee NI, and employer NI) is payable to HMRC every month or calendar quarter. PAYE periods run to the 5th of each month. The tax and NI are due to HMRC by the following 19th of each month. Furthermore, a business can pay its PAYE/NI quarterly instead of monthly if the expected bill is less than £1,500 each month (£18K for the entire tax year).

If your company only has one employee (you, the contractor) and you’re drawing a salary just above the NI threshold, HMRC will likely not be any NI or tax due for the first three quarters of the tax year. However, a small amount of NI is due in the fourth and final quarter of the tax year.

Contractor limited company tax (UK) -IR35, and how does this work?

Another type of limited company tax (UK) that may apply to contracting professionals is IR35. This type of contractor’s tax only applies if your company is caught by the IR35 rules. When you’re a contractor in the UK, you should take the required steps to ensure you are outside the IR35 rules. These rules originally came into play in the year 2000, and if you’re caught by IR35, your company’s contracting income is taxed like that of a regular employee.

To remain outside IR35, you can consider having your contract reviewed and improved by an employment law expert (e.g., Qdos). You could also consider taking out IR35 insurance, which Qdos and other contractor insurance specialists also provide.

Recently, the government has shifted the responsibility of IR35 onto the service providers (recruitment company /client) in the private sector. This is already in place for the public sector. In the private sector, the service provider must now determine the IR35 status if they’re a `large’ or `medium’ company. The shift doesn’t apply to `small companies’; therefore, if a contractor works for one of these, it’s still their responsibility to determine their IR35 status, and, as mentioned above, they can take steps to show they’re outside IR35.

Other aspects of contractor taxation 

Personal tax on dividend payments/dividend tax

Besides Ltd UK taxes, there’s personal tax to consider when you’re a business owner or director of a UK company. In addition, when you run your own company, it’s key to note there’s no NI on dividends. As a director and shareholder in your own company, you must pay personal tax on any taxable dividend income. This individual contractor tax on dividends is for any dividends not covered by your personal or dividend allowance. Dividend tax (and tax on other untaxed income) is payable to HMRC. The due date for personal tax payment is 31 January after the end of the tax year (5 April). Depending on your tax bill and income, you may also have to make payments on account for the following tax year. 

Sole-trader/self-employed

As a sole trader, you’ve less responsibility regarding the amount of filing you must undertake with the authorities. You’ll most likely pay your income tax and National Insurance via your Self-Assessment tax bill. If you’re VAT registered, you must pay over VAT, and if you run a PAYE scheme, you must pay over any tax and NI due on your employees’ salaries. 

What if you’re unable to meet your limited company tax (UK) bills?

It could be that you find your company can’t currently meet your company’s tax liabilities. When this is so, you should consider your options. Most importantly, a UK Ltd’s tax liabilities should always be paid; however, you should seek professional advice if you run into issues. 

Final thoughts

When you run your own private limited company, this is one of the most tax-efficient vehicles to operate through. Indeed, running the company efficiently will help reduce your contractor taxation. As a reminder, you help reduce your tax as a contractor by claiming all legitimate business expenses. In addition, you can reduce taxes by paying yourself a tax-efficient salary.

This guide covers the types of limited company tax (UK) a business may pay and how to pay tax as a contractor. In addition, we cover how limited company taxation works when you’re contracting in the UK. Therefore, when you operate your own company, you must:

  • Pay any business taxes for which you’re registered by their relevant due dates.
  • Make the relevant routine filings with Companies House and HMRC.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Company Taxes, First timer guide /

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