Looking for information about contractor tax? Then follow this simple guide to paying tax as your own limited company.
Everyone knows that the most tax efficient way of contracting or freelancing is through a limited company. By registering your own limited company the only contractor tax you will pay are Limited Company Taxes and Personal Taxes.
If functioning through a limited company correctly, you will be saving a lot of money even when paying these taxes while being eligible to claim back a wide range of expenses outside of IR35.
Within a limited company, the contractor tax comes in form of a 20% corporation tax which applies to limited companies earning under £300,000 in overall profits. However, your expenses come out of your overall profit and are not taxed, which is why claiming expenses is such an important part of being a contractor.
National Insurance Contributions
As part of contractor tax, your limited company is required to pay 13.8% on any salary paid to an employee over the amount of a hundred and thirty pounds a week. And that includes paying your own salary from the limited company which you are the owner of.
Fortunately, contractors are registered upon Value Added Tax (VAT) on a Flat Rate Scheme. This type of contractor tax scheme was bought in to simplify VAT for smaller companies and businesses, charging 20% on all invoices and then paying the HMRC back at a lesser rate.
PAYE and Income Tax
When contracting, income tax is directly deducted from your earnings as though you were employed by another company. However, there are different thresholds for income tax, so be sure to check up on the amount that you should be paying.
Employee’s National Insurance Contribution
And finally, if you receive payment and benefits from your own limited company, you will also be required to pay Employee’s National Insurance Contribution. So you get taxed for as an employer paying yourself from your own limited company and then you pay tax for receiving a salary as an employee of your own limited company.
As always, seek the advice of an accountant to help you with crucial dates of payment and to ensure that this does not place you inside IR35.