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% |
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