Do contractors pay less tax? Contractors using a limited company (sometimes called a personal service company) enjoy significant personal tax benefits over contractors using umbrella companies. There are more paperwork and regulatory requirements for a contractor limited company director to follow however, if they use a specialist contractor accountant and bookkeeping software, the extra administration required can be very light. How much tax do contractors pay?
In this article, we look at:
All directors and shareholders of contractor limited companies must register for self-assessment with HMRC. A self-assessment is a method of declaring your personal level of income to HMRC and the sources from which that income is derived.
The personal tax year runs from 6thApril to the 5thApril. Self-assessment returns are due by January 31stin the following year. There is a schedule of penalties and fines for late submission and payment as shown below:
| Date | Deadline | Fines & penalties |
| 5th April-31 January | Due on or by 31 January | N/A |
| 1 February-31 April | First three months' lateness | £100 |
| 1 May-30 July | Second three months' lateness | £10 a day fine (up to £900 fine if still not filed by 30 April) |
| 1 August-31 October | Third three months' lateness | 5% of tax due or £300, whichever is greater |
| 1 November-31 January | Fourth three months' lateness | 5% of tax due or £300, whichever is greater |
The level of tax paid personally by a contractor depends on the total income derived over the course of a tax year. Each taxpayer has a personal allowance of £11,850 (£12,500 from 6thApril 2019) which is not subject to income tax.
According to HMRC, the following counts as income:
Once all of those sources of income are added up during a year, a contractor director will fall into one of the tax bands below.
| Income bands (Eng/Wal/NI) | Rest of UK bands | Applicable income tax rate |
| Personal allowance | Up to £11,850 | 0% |
| Basic rate | £11,851 to £46,350 | 20% |
| Higher rate | £46,351 to £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
The higher rate bands moves from £46,351 to £50,001 from 6thApril 2019.
| Income bands (Scot) | Rest of UK bands | Applicable income tax rate |
| Personal allowance | Up to £11,850 | 0% |
| Starter rate | £11,851 to £13,850 | 19% |
| Basic rate | £13,851 to £24,000 | 20% |
| Intermediate rate | £24,001 to £43,430 | 21% |
| Higher rate | £43,431 to £150,000 | 40% |
| Additional rate | Over £150,000 | 45% |
Income tax is paid on monies earned during the course of a financial year and is applied to both the salary you take from your limited company and any other funds you take out of the business (with the exception of those in the list below). In addition to salary paid via the PAYE system, a contractor will pay income tax at the applicable rate above on any income which is not:
A contractor limited company’s director will start paying Employee’s National Insurance on the salary portion of their remuneration package once their PAYE income has met or exceeded £8,424 per year. From this point, 12% will be payable up to £892 a week worth of salaried income and 2% after that point.
Dividends are profits (after corporation tax) that are paid to the shareholders of a contractor limited company. The first £2,000 a year worth of dividends are not taxed. Beyond this point, the following rates of tax are payable within the following income bands:
| Current dividend tax | Tax on dividends |
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
Any contractor considering switching to an umbrella company will want to know how to find the best provider to work with.
Although you could spend your precious time and energy searching the web for the best umbrella company, there is an easier way – using an umbrella calculator.
In this guide, Umbrella Supermarket explains why every contractor should use an umbrella calculator in 2021.
If you are considering contracting you will need to decide on PAYE or umbrella.
It can be a difficult decision to make and contractors will inevitably be questioning which option will be the best for them.
To help every contractor get on the right track for them, in this guide Umbrella Supermarket looks at PAYE vs umbrella, outlining the key differences and how this will impact you.
There are many reasons that contractors across the UK opt to work under an umbrella company.
Umbrella companies offer an easy way to contract and remove the need for the contractors to worry about the burdens of admin, finances, tax and IR35, all things that limited company contractors have to deal with.
For this reason, many contractors will be weighing up their options and questioning whether it is worth using an umbrella company in 2021. To help make the decision that little bit easier, Umbrella Supermarket has put together this guide on the pros and cons of using an umbrella company.
Any contractor that is considering operating through an umbrella company in 2021 will need to understand Umbrella Company fees - from why an umbrella company charges fees, how they are paid to how much the contractor will pay.
In this guide, Umbrella Supermarket answers those all-important questions to help every contractor know exactly where they stand when it comes to umbrella company fees.
If you’ve made the decision to contract through an umbrella company in 2021, you will next need to find an umbrella company that’s right for you.
After all, there are lots of umbrella companies out there, so how do you know which one to choose?
To help you find the best umbrella company for you, in this guide Umbrella Supermarket outlines what makes a good umbrella company, so you can rest assured you’re making the right move.
One of the many advantages to operating through an umbrella company for contractors is that they become an employee of their chosen provider.
In turn, this means that the contractor will be automatically enrolled onto the umbrella company’s workplace pension scheme.
To help contractors find out more about umbrella company pensions Umbrella Supermarket has put together this handy guide.
If you are considering contracting through an umbrella company you will naturally have questions and queries over how they work.
After all, making the move to umbrella can be a big step for contractors. To help, in this guide Umbrella Supermarket explains how to get started with an umbrella company and share our top tips for using one in 2021.
PAYE or umbrella is a question asked by every contractor. Which one you opt for will have a big impact on your contracting career and lifestyle. So, it's important to make the right decision for you.
To help makes things a little bit easier, Umbrella Supermarket has put together this guide on PAYE or umbrella, outlining the key differences between each, to help you make the best and most informed decision for you.
One of the many benefits to working through an umbrella company is that you will receive holiday pay as well as a range of other statutory benefits including sick pay, maternity and paternity pay.
To find out more about umbrella company holiday pay, and how to calculate how much you will be entitled to, Umbrella Supermarket has put together this handy guide.
Contractors must make several decisions throughout their contracting careers. One big decision contractors have to make is how they will operate.
One way that contractors can work is through an umbrella company.
Umbrella companies have become an increasingly popular way to contract in the past few years, offering many benefits to the contractor. But, how do you know whether this option is right for you?
To help every contractor make the right decision for them, in this guide, Umbrella Supermarket explains when not to use an umbrella company.
There are tons of benefits to using an umbrella company, which is why they have become such a popular option for contractors in recent years.
After all, an umbrella company takes away the stress and hassle of operating through a limited company whilst offering contractors a range of advantages, such as statutory rights, paying them a salary, deducting correct tax levels and National Insurance, and taking care of tasks like expense processing and invoicing.
However, as more and more contractors opt to use the services of an umbrella company, more providers have started to claim that they are HMRC approved.
To bust the myths around HMRC approved umbrella companies and get straight to the facts, in today's guide Umbrella Supermarket look at whether HMRC approved umbrella companies really exist, so you know exactly where you stand.
If you're considering making the leap to contracting, you will understandably want to know how much you will have to pay in umbrella company costs. After all, this amount comes directly out of the contractor’s pocket, so it’s important to be clued up on how much you should expect to pay.
To help contractors, in this guide Umbrella Supermarket answer the all-important question of how umbrella companies cost in 2021.
