Contractor owned limited companies pay different types of tax to the employees, directors and shareholders of the business.
In this article, we consider:
Company corporation tax, whether a contractor or not, is paid once a year, 9 months after the end of an accounting period. It is ordinarily paid at 19% of company profit – profit is defined as the difference between the business’s income and the expenses over the period (with expenses for contractors being heavily regulated).
As taxation is vitally important to get right, for contractor limited companies and their directors, it is of vital importance that bookkeeping software is used and updated regularly. Additionally the accountants engaged by the company have access to this information and documentation. The job of an accountant is not only to accurately record and classify the incomings and outgoings of a business but to reduce the liability of tax that a company has to pay to HMRC legally as far as possible, and while with contractors this is often easier from an invoice point of view, when it comes to expenses it can get confusing so sharing as much information as possible promptly is always a good idea.
It is a company director’s responsibility to ensure that corporation tax is paid on time and in full to the bank account shown in correspondence from HMRC and using the same reference number. If payment in full is not possible by the date due, a company director should enquire about a “time to pay” arrangement with HMRC – an accountant’s advice should be sought prior to such a request.
If a contractor’s limited company makes a loss, it can carry that loss forward to the following year as long as the loss and the profit were incurred performing the same trade. For example, if a company lost £20,000 in one year and it made £30,000 in the following year, corporation tax on £10,000 would be payable as the loss in the previous year would be offset in the following year.
Companies can carry losses forward for many years however continuing year on year losses will make a company and its directors more likely to become the target of an HMRC investigation.
If a company files its return with HMRC one day late, there is a £100 fine. Another £100 fine is levied after 3 months. After 6 months, HMRC will estimate the size of the corporation tax bill it expects and issue a fine of 10% of that amount in addition to the 2 £100 fines issued to date. After 12 months, another 10% fine is issued.
A company cannot appeal against the fines based upon the estimated corporation tax. If a company files late for three years in a row, the £100 penalties on day 1 and month 3 are automatically increased to £500.
Like with continued losses, late filing will make a company and its directors far more likely to become the subject of tax investigations.
During any calendar month, a contractor’s limited company will pay its directors and staff salaries via the Pay As Your Earn (PAYE) Real Time Information service provided by HMRC. All employers must run a PAYE scheme.
When salary payments are made to staff and directors on the PAYE system, an employer has to hold those payments on behalf of HMRC. It then must pay all of the withheld monies to HMRC using an Employer Code by the 22ndof the following month.
Dividend payments which can top up a contractors earnings are not subject to PAYE deductions and are treated as self-employed income, which is taxed via an annual Self-Assessment (with the tax due paid directly to HMRC by the contractor).
This is a form of payroll tax, although it is most commonly known as Employer’s National Insurance contributions. It is an additional tax paid by the limited company based upon the sum of money paid to staff each month. In most cases, the amount is 13.8% of the pre-tax wage paid to a member of staff.
So, if a staff member was paid £2,500 in wages that month before tax and Employee’s National Insurance, Employer’s National Insurance would be 13.8% on top of the £2,500 (£345). At time of writing, this payment needs to be made for all staff members who are paid more than £162.01 a week (£702.01 a month).
Employer’s National Insurance must be paid to HMRC by the 22ndof the month following the payment of wages to staff and it must be as part of the same payment made to HRMC for income tax and Employee’s National Insurance.
For contractor limited companies operating within the construction sector as either a contractor or a sub-contractor, they may need to register as such with HMRC and enrol onto the Construction Industry Scheme (CIS).
HMRC defines a contractor as a company which subcontracts other to do work for it. A subcontractor is defined as an organisation which performs the duties set out in a contract for other companies. A contractor limited company can be registered as a contractor, a subcontractor, or both.
More information is provided on the HMRC website here.
For most VAT-registered contractor limited companies, VAT is paid quarterly no later than one month and seven days after the end of the VAT quarter. For most companies, the average VAT payment is around 3-5 weeks of their VAT inclusive turnover so provision within cash flow should be made for it.
Different payment deadlines are provided for the VAT Annual Accounting scheme.
There is a system of penalties for companies which fail to submit their contactor VAT return and/or pay their VAT on time. Surcharges range from 2% of VAT due to 30% of VAT due.
If a contractor limited company can not meet its VAT payment on time and in full, its director should ask the company’s accountant to help it arrange a “time to pay” agreement with HMRC.
There may be advantages to subscribing for the contractor flat rate VAT scheme. Read more about this here (link back to Responsibilities to HMRC page).
A contractor may borrow money from his or her limited company. However, if the loan is not paid back to the company within 9 months of an accounting year end, Section 455 tax will apply. The limited company will then have to pay 32.5% of the value of the outstanding loan in tax to HMRC, declaring it on the corporation tax form.
The 32.5% will be paid back to the company by HMRC once the director’s loan account has been settled. However, it can only be reclaimed on corporation tax forms meaning that it may be months or years before the company has the opportunity to reclaim the money.
There are also benefit-in-kind rules to consider. If the value of all loans given to a director rises above £10,000, it must be recorded on a P11d form. This is a complex area of taxation that requires the advice of an experienced accountant.
Director’s loans are usually a good way for contractors to extract company profits (as dividends) before actually ratifying these dividends officially. It can be a method by which contractors “level” out their income throughout the year, but beware, contractors can get into trouble if they don’t meet the profit level required to make the dividend cover the loan payments.
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.
