Many contractors and freelancers do not understand the tax implications of self-employment. On this page, you will find free tax information for contractors, including a thorough explanation of why it is more tax efficient to establish a limited company rather than working through an umbrella. Our free tax guide for contractors includes information about limited company taxes, corporation tax, VAT, National Insurance, PAYE, and more. We hope you will take advantage of this free information to make your business more tax efficient and more profitable. Why pay more tax than you need to as a contractor or freelancer?
The most important piece of tax information we can give contractors is that setting up a limited company is the best choice for remaining self-employed and still being as tax efficient as possible. A limited company keeps your tax liabilities to a minimum, to help you maintain compliance with the law and maximises your take-home pay. The only catch is one of doing your accounts correctly.
The UK has the distinction of being the most complex tax environment in the world. In fact, it sometimes seems as though we enjoy making the tax system as difficult as possible. However, setting up a limited company and complying with tax law does not need to be as complicated as some people make it. The contractor should learn what he/she can and utilise the services of an experienced accountant to make sure everything is done the right way.
A limited company in the UK is responsible for a number of different tax obligations. We have listed each tax consideration below, along with rates taken from 2014 as examples. Keep in mind that these rates may no longer be in play; they most certainly will change in later tax years.
All of these taxes are subject to their own individual rules and regulations. When you contract with a company like ICP, we handle all of the calculations and reporting for you. We also advise you when to pay your taxes and how much is owed.
As the director of a limited company, you are paid a salary from the company's total revenues. This dictates that you have personal responsibilities insofar as taxes are concerned. Assuming you are taking income in the form of salary and/or dividends, you will be required to pay income tax at the same rate as employed workers. For example, your first £10,000 is tax-free; anything above £10,000 – and up to £41,865 – is taxed at 20%. The higher bands of 40% and 45% apply to higher income earners.
The amount of tax you pay becomes more complicated when you figure dividends into the equation. If your total income does not exceed the first tax band, any dividends you earn will not be subject to income tax or National Insurance. Once you enter the second or third tax band, dividends are taxed at a rate of 25%. Employer's NIC is never applied to dividends.
Your limited company's tax obligations include Corporation Tax, VAT, PAYE, and Employer's NIC. As an individual earner employed as the director of your limited company, you will be required to file self-assessment tax returns just like any other UK worker. You will also likely need to make a down payment every July toward the following year's tax bill.
ICP considers it one of our primary responsibilities to ensure our clients remain in compliance with tax law. We keep track of how much tax you owe, when it is due and what might be required of you next year. Furthermore, we also advise you about how you can increase your tax efficiency by changing the way you do things. Finally, we handle all of the paperwork and reporting on your behalf. This includes the self-assessment tax return for a single company director.
It is true that UK tax law is complex. It is true that many contractors find it both confusing and overwhelming. Nevertheless, we believe you are still better off setting up a limited company and hiring us for accountancy services than to give up the tax efficiency and higher take-home pay of a limited company in favour of the convenience of working with an umbrella. Please do not hesitate to contact us to learn more. We would be happy to answer all of your tax related questions.