What Tax does a Contractor Pay?

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.

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Limited company tax

While discussing limited company tax, it’s important to recognise the company as one entity and you as a separate entity.

Corporation Tax

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.

Employer's National Insurance Contributions

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%.

VAT (Value Added Tax)

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.

Income Tax and PAYE

This can be a complicated subject due to the ability to draw money from your company in two ways:

  • Salary (as an employee)
  • Dividends (as a shareholder)

Any income taken as salary beyond your personal tax allowance of £12,570 (2022/23) is taxed in the following ways:

  • 20% on earnings between £12,571 and £50,270
  • 40% on earnings between £50,271 and £150,000
  • 45% on earnings above £150,000

It is also worth mentioning that once you earn beyond £100,000, your personal allowance will be reduced at a rate of £1 for every £2 of income until it is reduced to zero. By the time you hit £125,000, your personal allowance will have disappeared, meaning that your income between £100,000 and £125,000 will have been taxed at 60%.

Please note if you are a Scottish resident and pay tax in Scotland, these rates will differ.

Employee's National Insurance Contribution

Firstly, there is no National Insurance (NI) on dividends. You’ll pay NI on a salary which is 13.25% on anything you earn above £190 per week. After you earn £967 per week, you’ll pay a rate of 3.25% on anything above this limit

Important tax dates

Income Tax and National Insurance are, along with VAT, payable quarterly. Your accountant will be able to advise you of these important dates. The breakdown is as follows:

Company liabilities

  • Corporation tax: payable nine months and one day after the year-end
  • VAT: payable quarterly
  • Income Tax: payable quarterly
  • National Insurance: payable quarterly

Personal liabilities

  • Personal tax: (self-assessment): payable every 31st January, with potential payments on account in January and July

Got a question?

If you have any questions regarding contractor tax, simply request a callback, and a member of the team will be in touch.

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