How to pay taxes as a contractor
With the reform of IR35 paying taxes as a contractor has changed significantly. Whereas PSC contractors used to be in control of their tax concerns, IR35 now demands the client to determine the IR35 status of a contractor and if they are to be taxed as an employee. This means that a contractor’s tax may be subject to the PAYE system.
If you are captured by IR35 then working via an intermediary such as an umbrella company might be the best solution for you. The umbrella company will manage all tax deductions on your behalf. Let us show you how Cool Company can help you.
Contractor taxes: This is what you need to pay
Tax. There’s little wonder that for many people it’s a scary word. Not only does it eat away at your hard-earned cash but it can be fiendishly difficult to understand. If you’re a contractor, taxes have become even more difficult with the introduction of the IR35 legislation. So, what taxes do you have to be aware of as a contractor?
1. Corporation tax
Corporation Tax is the tax you pay on your company’s profits. For this, you have to make sure to keep all your accounting records as well as prepare and file a Company Tax Return to HMRC by your deadline.
2. PAYE & National Insurance (NIC)
PAYE (“pay as you earn”) refers to the income tax you are required to pay on income above your personal tax-free allowance. As a PSC contractor you are also responsible for paying National Insurance Contributions (NICs) on your income.
If your limited company’s turnover went over the VAT threshold (£85,000) within the last 12 months or you expect it to exceed this sum in the next 30-day period, you must register for and pay VAT.
What is a contractor’s tax rate?
In the UK, all workers have a personal allowance. Tax rates are broken into the following bands:
|Income per year||Rate|
|Tax free||£0 – £12,570||0%|
|Basic rate||£12,571 – £50,270||20%|
|Higher rate||£50,271 – £150,000||40%|
Common mistakes when completing a self-assessment tax return
- Not providing enough details. If you are completing a self-assessment tax return, you are obliged to provide full details of all income and Capital Gains relevant to a tax year. Missing any can land you in hot water further down the road.
- Misunderstanding IR35 status. The updated IR35 legislation has only been in force for a year in the private sector, but it’s already caused a lot of headaches. And if you get your IR35 status wrong, you may face a range of penalties.
- Inaccurate record keeping. Poor record-keeping doesn’t just make handling taxes as a contractor harder, but if you ever need to provide evidence to support your submission to HMRC, you could face penalties if the evidence isn’t available.
How to fix any tax issues early enough to avoid a problem?
If you make an error in your tax submission, there’s no need to panic. You typically have 12 months to correct any errors and report them back to HMRC. If you find a mistake within 72 hours of submission, you can make amendments through the government tax gateway. After that period, you will need to write to HMRC.
How an umbrella company will help you with your taxes
Umbrella companies remove the concerns for IR35 as the PAYE solution is outside the scope of the updated IR35 legislation. By taking care of a contractor’s tax, contracts, and payroll, we will make sure that they are always compliant, treated fairly, and that the right amount of tax is paid at the right time.
Paying taxes as a contractor may not be as easy as it once was. But contracting still has the potential to be a rewarding, lucrative, and enjoyable career choice. The new legislation simply means implementing new practices to get along. We will help you with this!
What new tax legislation should contractors be aware of for 2022?
IR35 is the greatest shift in tax responsibility in decades. And its effects are going to continue to be felt throughout this year, as both businesses and contractors get to grips with the new way of working. Umbrella companies and other intermediaries are providing the simplest solution for all parties.
Ready to learn more?
Cool Company can help you save time and clear your schedule for new activities and projects. We offer services that give you freedom from administrative, accounting and financial hassles so you can focus on what matters in life. Learn more about how Cool Company makes contracting simple for you.