Contractors across London can trust Berley to assist them with their specific tax responsibilities, ensuring that no valuable hours are wasted.

The contracting organisation, IT Contractors, completed a survey in 2018 and found that around 2 million professionals work on a self-employed basis, and 1.77 million of them contract on a full-time basis. The perks and flexibility of a contracting role continue to attract people to this ever-growing community, but if contractors don’t observe their tax responsibilities, the self-employed dream can become more of a nightmare.

With the dedicated assistance of our chartered accountants, contractors can rest easy knowing that their finances are in the hands of experts. At Berley, we tailor our services to your specific contractor needs, as we understand that every contractor is unique. We can provide you with all the advice and guidance you require to make informed decisions regarding your taxes.

Starting up as a contractor

Before you even contemplate your tax obligations as a contractor, you need to be legally established.

There are many ways in which you can be set up as a contractor but the two common ones are:

• A limited company
• An umbrella company

A limited company

A limited company is legally separate from the people running it, meaning that they are entities and separate taxpayers – the company’s finances are separate from the personal finances of the owners.

If you’re working as a contractor, a limited company is often the better option as it is tax efficient and your take-home pay is maximised. For contractors operating under a limited company, your main tax obligations include National Insurance Contributions (NICs), Corporation Tax, Dividend Tax, VAT and income tax.

National Insurance Contributions (NICs)

If you’re drawing a salary of more than £166 to £962 a week, you’re required to pay 12% Class 1 National Insurance rate. For a salary above £962 a week, you’ll need to pay a 2% charge on the additional earnings.

Many contractors choose to pay themselves a low salary (hence lower National Insurance Contributions) and make up their income by declaring dividends – a sum of money that a limited company pays out to its shareholders. The reason is simple – dividends aren’t subject to National Insurance Contributions and are also taxed at a lower rate than salaries.

Corporation Tax

This type of tax refers to a levy paid on a company’s profits – as soon as a company makes a profit, it needs to start paying Corporation Tax. In 2019, the Corporation Tax rate for company profits is 19%, which is standardised for all businesses. The government has promised to reduce this rate to 17% for tax year 2020/21.

In terms of Corporate Tax, the tax year spans from 1 April to 31 March – and you have 12 months from the end of your accounting period to file your return and nine months to pay any tax that is due. To ensure that you adhere to the timeline, Berley’s accountants can keep you on track.

For contractors operating outside of IR35, you can also claim legitimate expenses which will also help to lower your tax bill.

Dividend tax

When a company has paid its Corporation Tax, the retained profit can be distributed as dividends to the shareholders – this would usually refer specifically to you, as you’re likely to be the shareholder of your limited company.

Many contractors use dividends to form part of their income given that:

• Dividends have a lower tax rate than salaries. For tax year 2019/20, dividend tax rates are 7.5% (up to £37,500), 32.5% (£37,501 to £150,000) and 38.1% (over £150,000), which you must declare on your self-assessment.
• Dividends are not subject to NICs.
• A £2,000 dividend allowance is provided, meaning the first £2,000 of dividends are not taxable.

To pay dividends you must declare them in the company board meeting minutes and put them in writing in a dividend voucher, which shows the date, the name of the company and the name(s) of the shareholders(s), whom are being paid a dividend, as well as the actual amount of the dividend.

Value Added Tax (VAT)

As a contractor, you’ll most likely be registered for Value Added Tax (VAT). This tax applies to all the services that you offer to your clients. Every quarter, you’ll have to submit a VAT return to HMRC as well as an electronic payment for this sum.

Many contractors also apply to HMRC for the VAT Flat Rate Scheme – allowing you to negotiate a reduced fixed rate of VAT while maintaining the differences between what you pay and what you charge your customers. Your VAT turnover must be less than £150,000 (excluding VAT) a year for you to join the scheme.

Income Tax

If you’re a contractor, a director of a limited company or a business partner, you’re required to file a tax return. By failing to submit your self-assessment tax returns by 31 October (paper) or 31 January (online) you’re at risk of being penalised. Take advantage of Berley’s accountancy services to assist you with this assessment, making sure that it is correct and submitted in time.

An umbrella company

This type of company employs agency contractors who work on temporary contract assignments. In this structure, you’ll be ‘employed’ by an umbrella company and will need to submit timesheets and expenses to the company – allowing them to handle any administrative issues, calculate your taxes and NICs for a monthly fee (usually a percentage of your earnings).

This option does sound easier, but you are likely to pay more as the monthly fee charged by the umbrella company can be substantial. In the end, you’ll probably take home 60-65% of your total contract earnings. If you were working for a limited company, you would probably take home more, but you would have more responsibilities to handle.

Specialist accountants for contractors

To decide which route to take when it comes to setting up as a contractor, our chartered accountants for contractors are happy to help. For established contractors attempting to juggle their tax duties along with all their other responsibilities, our comprehensive contractor accountancy services will ensure that your business runs at its best.

Call us on 020 7636 9094 or use our Online Form to arrange a no-obligation meeting and find out what Berley can do for you.

If you’d like more information concerning business growth, you can check out:

• Preparing your business for Making Tax Digital
• Changes in stamp duty land tax (SDLT) on residential property
• IR35: What you need to know
• Transferring child trust funds to Junior ISAs

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.