Introduction -contractor limited company tax (UK)
In this guide, we look at UK contractor taxation for an independent contractor. When you run your own company, there’s different types of business taxes. In this guide, we’ll research what tax does a limited company pay and consider contractor taxes. We’ll also research taxes for a new ltd (UK) company. This includes what taxes do contractors pay and how much tax do contractors pay (UK). When contracting, professionals should plan for contractor limited company tax, and minimise the tax for contractors wherever possible. Basically, many limited company contractors ask their accountants what tax am I liable for as a ltd company? Indeed, if your business structure is that of a UK contracting professional with your own limited company, as opposed to being an employee or working through an umbrella company, you’ll have extra limited company tax (UK) responsibilities, and this’ll include your business taxes.
When running a UK limited company, you’ll have various duties and responsibilities as a company director. Basically, these include routine filings with Companies House and HMRC. These include being aware of UK contractor tax legislation and paying over any UK limited company tax. You have to deal with ltd taxes (UK) throughout the company year in respect of any self-employed contractor taxes. Therefore, in this guide we’ll look at how tax for contractors (UK) work in detail. Furthermore, we’ll research the main types of UK ltd taxes.
When you’re contracting through your own company, there’s 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’ll need to 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 contractor taxation
First thoughts on independent contractor taxes (UK)
When you run your own UK contracting company, what tax does a limited company pay throughout the year? There is a whole range of tax rates and allowances against different UK contractor company taxes. We’ll explain in this guide what is contractor limited company tax (UK). 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. Basically, most contractors and small business owners choose this type of company.
Some often-asked questions in respect of private contractor taxes include:
- 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?
In this guide, we’ll take a look at the above and discover how taxes work for UK limited companies.
What tax does a limited company pay?
This UK limited company contractor taxation guide 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? Basically, there’s 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)
Top tips to minimise your limited company contractor taxation
When you’re a UK contractor and running a limited company, there’s various ways how you can improve things for yourself. As part of this, there’s tax planning opportunities which can help you minimise your exposure to contractor limited company taxation (UK). Basically, these tips in respect of minimising how much tax do 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 contractor tax (UK) than you need to.
Indeed, one of the factors which affect how much tax does a contractor pay is how much they earn. However, working and operating your company on a tax-efficient basis 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 two separate legal entities. Indeed, this is how it is in the eyes of the law. What’s more, your company’s money is not directly yours. Therefore, you shouldn’t treat the company’s bank account as such. It’s essential to keep track of your company’s finances as time goes by. Furthermore, when it comes to taxes for your business, it’s important that while running your company you don’t find yourself in a position where your company cannot pay its UK contractor taxes.
As a UK business, your company pays limited company tax on its profits. On the other hand, as an individual, you’ll pay contractor income tax (and possibly NI) on your personal income. This’ll include the income you receive from your company and other sources. Therefore, when you’re paying tax as a contractor (UK), the limited company taxation applies to UK companies, and personal taxation (UK) applies to individuals who are subject to UK personal tax.
UK contractor taxation -filing dates
In advance of reading the below, we’ve detailed all relevant filing dates. This’ll show you how to keep track of taxes as a contractor and you may need to meet these dates as both a company director and someone who files a Self-Assessment Tax Return. It’s a good idea to make diary notes of these to track which dates need meeting each year.
Furthermore, when you have your own company, one of the main responsibilities is filing annual company accounts. A good accountant will take care of this and any tax requirements for contractors. They’ll also 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 and the types of contractor taxation
Contractor taxation -Corporation Tax (CT)
The first type of UK limited company tax when you’re paying taxes as an independent contractor is Corporation Tax. Limited companies pay Corporation Tax for each accounting period that 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.
Out of your taxes as a contractor, CT is the principal tax for your company as mentioned. Therefore, it makes sense to claim for all your genuine business expenses each year. 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 also help reduce CT. Therefore, from the outset, you should consider what your salary is going to be. In addition, you could also consider employing your spouse if they’re going to be helping you run your company.
When we consider what contractor tax (UK) your own limited 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 September 2023, your company would pay CT on its profits for the year to 30 September 2023.
Corporation tax -further details part 1
The current UK limited company tax rate, in terms of Corporation Tax was 19%, and up to 31 March 2023 and all companies pay this Corporation Tax rate on their profits. This is a tax for contractors when they run their own UK limited company. In fact, this 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 that 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. Basically, the 25% rate applies to profits above £50,000 with marginal relief for profits of up to £250,000. Therefore, this means that:
- 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 2022, the CT would be due for payment to HMRC by 1 April 2023.
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 has increased in value. Therefore, it’s the gain that is taxable, not the amount of money you receive. When a company makes gains, these are taxable at the same rate as CT. The tax on this 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 tax for contractors is VAT. Most UK contractors will register for VAT. It’s compulsory to register for VAT if your annual turnover is over £85,000. However, you can also opt to 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 also recover any VAT you incur on your costs and expenses. Any VAT you pay to suppliers is effectively reclaimable from HMRC each quarter. There is also the option to operate under the Flat Rate VAT scheme. However, this is now less attractive for contractors due to the limited cost trader rule.
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, this will be refundable by HMRC.
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 31 December 2023, the due date for filing the return and paying the liability by internet transfer would be 7 February 2024. If you pay by direct debit, HMRC will take the liability on 10 February 2024.
Contractor taxation -PAYE / National Insurance contributions (NICs) on salaries
Another tax for ltd (UK) and the third type of tax for contractors is PAYE/NIC.
PAYE / National Insurance (NI) is part of your limited company taxation, and is payable to HMRC based on any salary a business pays its employees. The employee will earn tax-free pay initially, and depending on their earnings, they may have income tax, and employee National Insurance deducted. Depending on the pay level, the employer may also have to account for the employer’s national insurance.
The sum of the three amounts (PAYE income tax, employee, and employer NI) are payable to HMRC every month or calendar quarter. PAYE periods run to the 5th of the month each month. The tax and NI are due to HMRC by the following 19th of the 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, there’s unlikely to be anything due to HMRC for the first three quarters of the tax year. A small amount of NI will be due in the fourth and final quarter of the tax year.
Contractor limited company tax (UK) -IR35
One other type ltd company tax (UK) and a tax for contractors that may apply is IR35. This type of contractor’s tax will only apply if your company is caught by the IR35 rules. Basically, when you’re a contractor in the UK, you should take the required steps to ensure you are outside the rules called IR35. 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 a regular employee.
To remain outside IR35, you could consider having your contract reviewed and improved by an employment law expert (e.g., Qdos). You could also consider taking out IR35 insurance. Qdos and other contractor insurance specialists provide this too.
In recent times, 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 that they’re outside IR35.
Other considerations on contractor taxation
Personal tax on dividend payments / dividend tax
Besides ltd UK taxes, there’s also personal tax to consider when you’re a business owner or director of your own 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’ll need to pay personal tax on any taxable dividend income. This individual contractor tax on dividends is in respect of any dividends that aren’t covered by your personal allowance 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 need to make payments on account for the following tax year.
Sole-trader / self-employed
As a sole trader, you have less responsibility regarding the amount of filing you must undertake with the authorities. In most cases, you’ll pay your income tax and National Insurance via your Self-Assessment tax bill. If you’re VAT registered, you’ll need to pay over VAT, and if you run a PAYE scheme, you’ll need to pay over any tax and NI due on your employees’ salaries.
You are unable to meet your limited company tax (UK) bills
It could be the case that you find your company cannot currently meet your company’s tax liabilities. When this is so, you should consider your options. Most importantly, UK ltd tax liabilities should always be paid, however if you run into issues, you should seek professional advice.
When you run your own private limited company, this is one of the most tax-efficient vehicles to operate through. Indeed, this is because when you run the company efficiently it’ll help reduce your contractor taxation. As reminder, you help to reduce your contractor tax (UK) by claiming for all legitimate business expenses. In addition, you can also reduce taxes by paying yourself a tax-efficient salary.
Within this guide, we cover the types of limited company tax (UK) that a business may pay and how to pay tax as a contractor. In addition, we cover how limited company taxation works when you’re UK contracting. Therefore, when you operate your own company, you must:
- Pay any business taxes which you are registered by their relevant due dates.
- Make the relevant routine filings with Companies House and HMRC.
Link to Contractor Advice UK group on