Introduction -contractor limited company tax (UK)
We look here at UK limited company tax for an independent contractor and delve into what is involved in contractor taxation. If your employment status is that of a contractor with your own company, as opposed to being an employee or working through an umbrella company, you will have extra responsibilities, and this will include your contractor taxes.
If you run a UK limited company, you will have various duties and responsibilities as a company director. These include dealing with ltd taxes (UK) throughout the year. Therefore, in this guide we will look at how tax for contractors’ work in detail and aim to show limited company tax explained.
When you are contracting through your own company, you will have many different things to deal with daily including any contractor taxation responsibilities. On the other hand, when working through an umbrella company, all financial and administrative duties will be dealt with on your behalf.
Initial thoughts regarding contractor taxes
When you run your own company, what tax does a limited company pay throughout the year? There is a whole range of tax rates and allowances against different taxes. We will show how these apply to the taxes that a UK contractor’s company will pay.
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. Notably, most contractors and small business owners choose this type of company.
This contractor taxation guide will be a helpful overview if you are about to set up your company for the first time. When we consider what limited company taxes your business may pay, there are three main types of contractor taxes. However, it could be less if your business does not register for either VAT or PAYE.
Top tips to minimise your contractor taxation
When you are a contractor, there are various ways that you can improve things for yourself. As part of this, you can help minimise your exposure to contractor limited company taxation (UK). These tips include:
- Maximise your take-home pay.
- Negotiating the best rate for your work.
- Ensure you do not pay more tax than you need to.
Two separate legal entities
When you are a contractor running your own company, the individual (you) and your company are two separate legal entities in the eyes of the law. What is more, your company’s money is not directly yours; therefore, you should not treat the company’s bank account as such. It is essential to keep track of your company’s finances as time goes by. What’s more, it is important that throughout running your company, you do not find yourself in a position where your company cannot pay its tax liabilities.
Please note that your company will pay company tax on its profits. On the other hand, as an individual, you will pay income tax (and possibly NI) on your personal income. This will include the income you receive from your company and other sources.
Contractor limited company tax (UK) -filing dates
In advance of reading the below, we have detailed all relevant filing dates. This will 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 is 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 for you. They will also look after the filing of official documents and let you know when to make a payment for a limited company tax liability.
What tax does a limited company pay, and the types of contractor taxes
Limited company tax -Corporation Tax (CT)
The first type of UK limited company tax is Corporation Tax. This is payable by every company that makes a profit every 12 months. CT is the main tax within contractor taxes.
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 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 are going to be helping you run your company.
When we look at what tax a limited company pays, the main tax that all UK companies pay is CT on their profits for each accounting period. Each company has to have a financial year-end for filing and tax reasons. Therefore, if your company’s year-end was 30 September 2022, your company would pay CT on its profits for the year to 30 September 2022.
Corporation tax -further details
The current Corporation Tax rate is 19%, and up to 31 March 2023, all companies pay this rate on their profits. This is the main tax for contractors when they run their own limited company. 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. Please note that following the March 2021 Budget, the Chancellor has confirmed an increase in the corporation tax (CT) rate. This will increase from 19 to 25 per cent from 1 April 2023. The 25% rate will apply to profits above £50,000 with marginal relief for profits of up to £250,000. This means that:
- Profits up to £50,000 will pay Corporation Tax at 19%.
- Company profits between £50,000 and £250,000 will pay 19% on the first £50,000 and 25% on the remainder.
- Profits above £250,000 will pay 25% on all of the profits.
Once you register your company with Companies House, HM Revenue & Customs (HMRC) will also 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. Please also note that the gain 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 also payable to HMRC as part of the company’s overall CT bill.
Contractor limited company tax -Value Added Tax (VAT)
When we look at what tax a limited company pays, another tax for contractors is VAT.
Most contractors will register for VAT.
It is 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 are a VAT-registered business, you will 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 are 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 are 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 2022, the due date for filing the return and paying the liability by internet transfer would be 7 November 2022. If you pay by direct debit, HMRC will take the liability on 10 November 2022.
Contractor limited company tax -PAYE / National Insurance contributions (NICs) on salaries
When looking at what tax a limited company pays, the third type tax for contractors is PAYE/NIC.
PAYE / National Insurance (NI) 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.
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 are drawing a salary just above the NI threshold, there is 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 -IR35
One other type of 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. Notably, when you are a contractor in the UK, you should take the required steps to ensure that you are outside the rules called IR35. These rules originally came into play in the year 2000 and if you are caught by IR35 your company’s contracting income will be 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, and Qdos 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 are a `large’ or `medium’ company. The shift does not apply to `small companies’; therefore, if a contractor works for one of these, it is still their responsibility to determine their IR35 status, and, as mentioned above, they can take steps to show that they are outside IR35.
Other considerations regarding contractor taxes
Personal tax on dividend payments
There is no NI on dividends. As a director and shareholder in your own company, you will need to pay personal tax on any dividend income that is not covered by your personal allowance or dividend allowance. Personal tax (on dividends and 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 will pay your income tax and National Insurance via your Self-Assessment tax bill. If you are VAT registered, you will need to pay over VAT, and if you run a PAYE scheme, you will need to pay over any tax and NI due on your employees’ salaries.
Unable to meet your company tax bills
If you find at any time your company cannot currently meet your company’s tax liabilities, you should consider your options.
When you run your own private limited company, this is one of the most tax-efficient vehicles to operate through. We cover here the types of contractor taxation in terms of UK company tax and how these taxes work. Therefore, when you operate your own company, you may need to pay some or all of these taxes when you are in business for yourself.
Link to Contractor Advice UK group on