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Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
Cardwell Management Services UK Limited
Regency House, 45-51 Chorley New Road, Bolton, BL1 4QR
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Just4contractors.com > Help & Advice > HMRC Compliance
Do I really need to consider the HMRC?
HMRC is responsible for collecting the bulk of tax revenue and strengthening the UK's frontiers. HMRC was formed to ensure that the correct tax is paid at the right time, whether this relates to payment of taxes received by the department or entitlement to benefits paid.
As a freelance contractor, you must be aware of your responsibilities and paying tax is one of them. There are 2 types of taxes that HMRC collects and administers: Direct and Indirect taxes. Direct taxes are paid by you or your business on money you earn or capital you gain. Indirect taxes are taxes paid by you or your business on money spent on goods or services.
VAT is an indirect tax that you need to charge on your invoices to agencies or clients at the standard rate of 15%, other rates are: reduced rate at 5% and zero-rate is 0%. This money is collected by the company on behalf of HMRC that you must account for on a quarterly basis.
The vast majority of professional contracting companies are registered for VAT. Once you are registered, you have to account for output tax on all your taxable supplies, as well as send in regular VAT returns. Therefore you need to consider whether registering will really benefit you even if your taxable turnover is below the threshold. The current VAT registration threshold is £58,000 and the deregistration threshold is £56,000. The concept of VAT is simply getting the difference between input tax, which is the VAT that you pay out to your suppliers for goods and services that you purchase for your business, and output tax, which is the VAT on your sales of goods and services collected by you from your customers. This value is remitted to HMRC or reclaimed at the end of your VAT reporting period. There are still several exceptions and special rules so it is best to consult your accountant about VAT.
For limited companies:
Corporation tax is one type of direct tax that all limited companies are subject to. This is a tax on your company's taxable income or profits. The rates vary between 0% and 30%. Most contracting companies pay the small companies rate of 20%. Corporation tax is payable 9 months after your year end. As a contractor, you need to determine if your contract is caught by IR35. If your contract is caught by IR35, corporation tax will be applied on the company's income, where your salary and expenses will approximately be equal to the company's income. If your contract is not caught by IR35, your corporation tax is 20% of your net company profit.
Employer's National Insurance Contributions (Class 1) are earnings-related and are made up of the employee's contribution and the employer's contribution. An employee is liable to pay contributions if they are aged 16 or above, and below the State Pension age, which is 65 for men and 60 for women; and if they earn more than the Earnings Threshold. An employer is liable to pay contributions on all their employee's earnings above the Earnings Threshold. If your contract is caught by IR35, the amount of Employer's NIC will be based on the salary which is substantially higher compared to being outside IR35, where you are advised on taking a low salary and high dividends. No NIC are chargeable on company dividends. These contributions are paid monthly.
For directors and employees:
Aside from the company's tax responsibilities, you also have to pay personal taxes that are made up of the income tax via the PAYE (Pay As You Earn) scheme and Employee's NIC (Class 1).
Income tax is paid on a monthly basis. As a contractor, if your contract is caught in IR35, your entire income from the company will be subject to PAYE. If the contract is outside IR35 then only a very small amount of your income tax will be deducted through PAYE. There will also be tax credits on the dividends that you will receive which covers your basic rate tax liability. If your taxable income is less than the higher rate threeshold, then you will not have to pay income tax. Any income in excess of the higher rate tax threshold will be subject to the difference between the higher rate (which is currently at 40%) and the basic rate (which is currently 22%).
Employee's National Insurance contribution will depend on the IR35 status of your contract. If your contract is caught by IR35 then you are liable to contribute 11% up to £670 per week and 1% thereafter. If your contract is not caught by IR35 then you will pay very little, if any. Employee's NIC are paid monthly.
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As a freelance contractor, you must be aware of your responsibilities and paying tax is one of them. There are 2 types of taxes that HMRC collects and administers: Direct and Indirect taxes. Direct taxes are paid by you or your business on money you earn or capital you gain. Indirect taxes are taxes paid by you or your business on money spent on goods or services.
VAT is an indirect tax that you need to charge on your invoices to agencies or clients at the standard rate of 15%, other rates are: reduced rate at 5% and zero-rate is 0%. This money is collected by the company on behalf of HMRC that you must account for on a quarterly basis.
The vast majority of professional contracting companies are registered for VAT. Once you are registered, you have to account for output tax on all your taxable supplies, as well as send in regular VAT returns. Therefore you need to consider whether registering will really benefit you even if your taxable turnover is below the threshold. The current VAT registration threshold is £58,000 and the deregistration threshold is £56,000. The concept of VAT is simply getting the difference between input tax, which is the VAT that you pay out to your suppliers for goods and services that you purchase for your business, and output tax, which is the VAT on your sales of goods and services collected by you from your customers. This value is remitted to HMRC or reclaimed at the end of your VAT reporting period. There are still several exceptions and special rules so it is best to consult your accountant about VAT.
For limited companies:
Corporation tax is one type of direct tax that all limited companies are subject to. This is a tax on your company's taxable income or profits. The rates vary between 0% and 30%. Most contracting companies pay the small companies rate of 20%. Corporation tax is payable 9 months after your year end. As a contractor, you need to determine if your contract is caught by IR35. If your contract is caught by IR35, corporation tax will be applied on the company's income, where your salary and expenses will approximately be equal to the company's income. If your contract is not caught by IR35, your corporation tax is 20% of your net company profit.
Employer's National Insurance Contributions (Class 1) are earnings-related and are made up of the employee's contribution and the employer's contribution. An employee is liable to pay contributions if they are aged 16 or above, and below the State Pension age, which is 65 for men and 60 for women; and if they earn more than the Earnings Threshold. An employer is liable to pay contributions on all their employee's earnings above the Earnings Threshold. If your contract is caught by IR35, the amount of Employer's NIC will be based on the salary which is substantially higher compared to being outside IR35, where you are advised on taking a low salary and high dividends. No NIC are chargeable on company dividends. These contributions are paid monthly.
For directors and employees:
Aside from the company's tax responsibilities, you also have to pay personal taxes that are made up of the income tax via the PAYE (Pay As You Earn) scheme and Employee's NIC (Class 1).
Income tax is paid on a monthly basis. As a contractor, if your contract is caught in IR35, your entire income from the company will be subject to PAYE. If the contract is outside IR35 then only a very small amount of your income tax will be deducted through PAYE. There will also be tax credits on the dividends that you will receive which covers your basic rate tax liability. If your taxable income is less than the higher rate threeshold, then you will not have to pay income tax. Any income in excess of the higher rate tax threshold will be subject to the difference between the higher rate (which is currently at 40%) and the basic rate (which is currently 22%).
Employee's National Insurance contribution will depend on the IR35 status of your contract. If your contract is caught by IR35 then you are liable to contribute 11% up to £670 per week and 1% thereafter. If your contract is not caught by IR35 then you will pay very little, if any. Employee's NIC are paid monthly.
Next Page >>