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If you've thought about contracting and starting up your own limited company, you’ll find our guide to contractor tax useful. The limited company route is the most tax-efficient way of operating, but there’s a lot of information to take in.
Tax is a complicated subject, and there’s no getting away from it. However, this shouldn’t stop you from forming your own limited company, taking advantage of the range of tax benefits, and pursuing your goal of company ownership.
While discussing limited company tax, it’s important to recognise the company as one entity and you as a separate entity.
All limited companies must pay Corporation Tax on their profits; the current corporation tax rate is 19% (2022/23).
This means that if you invoice your client £100,000 excluding VAT over the year and have expenses of £20,000, you will pay 19% on the remaining £80,000. The company’s corporation tax is due nine months and one day after the year-end.
Your company will pay 13.8% on any salary you pay yourself over the threshold of £175 per week; however, there is no National Insurance to pay on dividends. Working through your own limited company allows you the flexibility to structure your income in the most tax-efficient manner.
If you work through an umbrella company, you will have to pay Employee's National Insurance of 13.25% and Employer's National Insurance of 15.05%.
As a contractor, you’ll more than likely be registered for VAT. You charge this on your invoices at 20%.
Most contractors also apply and register for the Flat Rate VAT Scheme, which means you charge 20% but then repay at a lower rate. You are entitled to a discount of 1% during your first year in the scheme. One drawback of this scheme is that the difference you keep is considered a profit; therefore, this is subject to Corporation Tax.
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