First, let’s have a quick look at various company tax that a contractor needs to be aware of.
- Salary – If the company pays the contractor a monthly salary of above £719 then the company will start to pay 13.8% of employer NI. As long as the monthly salary doesn’t exceed £719 a month then there will be no employer NI that the company needs to pay.
- Taxable Benefits – If the company provides the contractor any personal benefits, such as company car for personal use by the contractor, private medical insurance, any other benefits that are provided to the contractor for personal use will be treated as a taxable benefit. If that is the case then the company must pay 13.8% Class 1A NI on the benefit provided (Calculation is required to determine the taxable benefit).
- VAT – If the company is VAT registered, then by law the company must submit VAT returns to HMRC (typically on a quarterly basis). When a VAT registered business invoices its clients, they charge 20% VAT on top of the NET amount. This means the 20% VAT is collected on behalf of HMRC and this amount must be paid back to HMRC on a quarterly basis. A typical contractor will also register his/her company for a Flat rate scheme and by using the scheme they can simply pay back only 15.5% VAT to HMRC instead of the 20% collected from their client in the first year of trading. After the first year, they will have to pay 16.5% of VAT every quarter to HMRC. Obviously, if there are no sales/income in a particular VAT period then no VAT is payable to HMRC.
- Corporation Tax – If the company makes a profit in an accounting year then it must pay corporation tax at 19% i.e once the company accounting year end is completed the corporation tax is payable by 9 months and 1 day from the end of the company year-end. This is simply calculated at 19% on the profits made by the company during the year. Good News! We can also expect the corporation tax rate to come down to 17% by 2020.
That’s IT! That is all you need to know from the company’s perspective, Now let’s have a look at the personal side.
- Salary Tax- If a contractor takes a monthly salary of less than £719 then there won’t be any income tax or employee NI to pay. If the salary goes above £719 a month then the employee NI of 12% kicks in, and if the annual salary goes above £12,500 then the income tax of 20% will become payable on the excess.
- Taxable Benefits – If a contractor receives a taxable benefit from his/her company then not only the company pays class 1A NI as mentioned above, but the contractor will have to pay income tax at 20% if a basic rate taxpayer or 40% if a higher rate taxpayer on the taxable benefit. Taxable benefits are added as income on the self-assessment tax return. (Calculation is required to determine the taxable benefit).
- Dividend Tax – From 06 April 2019 – 05 April 2020, the first £2,000 of dividend will be tax-free and any dividend received above this allowance will be taxed at 7.5% for the basic rate tax payer and 32.5% for the higher rate tax payer. And that’s the end from the personal tax point of view.
The above article was prepared with tax rates applicable for the tax year 2019-20 and on various assumptions. Each contractor’s situation varies therefore if you would like to know more on the above tax rates and rules then please feel free to contact us.