As a contractor trading through a limited company (also known as a personal service company), you need to be on top of your tax liabilities.
If you used to work as an employee or through an umbrella company or agency, you may find things more complex now – which they are, and you’ll almost certainly need some professional advice and assistance.
As a director and shareholder of your limited company, your tax responsibilities are now two-fold: corporate and personal, and they need to be kept separate.
Corporate tax liabilities:
- Corporation tax
- PAYE + NI Contributions
Corporation tax – this is payable on taxable profits – i.e. turnover less salaries, expenses and any other deductions such as pension contributions. Payment must be made within nine months of the end of the company’s financial year. It’s up to you as the director to make sure this happens by completing the tax return and paying the tax on time.
The corporation tax rate for taxable profits up to £300,000 is 20%. Most contracting businesses pay this rate. Companies with taxable profits over £1.5 million pay 23% (2012-13). If profits fall between the two, the marginal rate is 27.5%.
VAT – if the company is registered for VAT (which it has to be if it has turned over £82,000 or more in the previous 12 months), it must charge VAT of 20% on its invoices to customers. The company passes the total VAT it has collected each quarter to HMRC – less the amount of VAT the company has paid on its own purchases, such as fuel and stationery. As director, you must ensure the right amount is paid, at the right time.
Alternatively, the company may consider registering for the Flat-Rate Scheme. which takes a lot of the headache out of calculating how much VAT is due each quarter. Instead of working out how much VAT the company has charged, and deducting all the VAT it has paid, the company pays HMRC a fixed percentage of turnover, of between 8% and 14.5%. The rate depends on the type of business.
This is much more convenient, and can leave the company with a small profit.
We’ll advise you which scheme best suits your company. We’ll also take all the headache away from you by preparing your corporation tax and VAT returns for you. Find out how.
PAYE – income tax and NI contributions – the company is responsible for deducting income tax and employee NI contributions from the salary it pays you. It also has to pay employer NI contributions.
- The employee NI contribution rate is 12% on earnings of between £149 and £797 per week, and 2% above that.
- The employer NI contribution rate is 13.8% on earnings and benefits in kind over £148 per week.
Personal tax liabilities:
Self-assessment tax return – if you have any income other than your company salary, you must complete a self-assessment tax return (SATR) by 31st January in the year following the tax year in question. Income tax is payable in two instalments – at the end of January and July.
The most likely income for you to declare on the SATR will be any dividends the company has paid to you, along with any other personal income such as investment and rental income. Your salary will already have been taxed by the company through PAYE, but it still needs to be included in the SATR.
It’s your responsibility to complete the SATR accurately, and pay the tax on time. Late payments incur interest charges.
The dividends you receive from the company will be paid to you with a 10% tax credit – they are paid from taxed company profit, and so have already been taxed once.
The personal income tax rates for dividends for 2015-16 are:
- 10% (basic rate, up to £31,785 )
- 32.5% (higher rate, £31,786 to £150,000)
- 37.5% (additional rate, over £150,000)
So you only pay income tax on dividend income if your earnings for the tax year are over £31,785. The effective rate you pay is 25% (higher rate) and 30.56% (additional rate).
We can advise you on your personal tax liabilities, and complete your SATR for you.