While operating as a limited company contractor is the most tax efficient way of working on a freelance basis, it is unfortunately not as simple as merely registering as a limited company and choosing to pay less income tax and National Insurance.
Instead, there are a number of things you need to be aware of with regard to what is expected of you from HM Revenue and Customs (HMRC), from calculating your own personal tax return, to ensuring you keep accurate and detailed accounts.
As a result, there are a number of accountancy services providers who are experienced in advising contractors in all relevant areas, helping to keep their books and ensure they comply with all HMRC regulations. This is a common practice as very few contractors feel confident in keeping their own accounts, but if you are still interested to see how important tax is to limited company contractors read on for a summary of the basics.
What do I have to pay tax on?
You are required to pay tax on any profits made by your limited company. If you invoice a client for a contract, that will be classed as a form of income and subject to tax. The remainder of your taxable profits consists of interest received on any money held in deposit, the sale of any company assets, rent received for any land or property and any other type of income.
Once this has been calculated, you can take off any relevant deductions in the form of reliefs, losses or allowances. The rate of corporation tax you are required to pay differs depending on the level of profits your company makes, but it is applied to the calculation of pretax profits above to work out the amount you owe.
When do I pay it?
As a limited company, you essentially determine your own financial year, as the accounting period you need to make calculations for is taken from the date of the financial accounts you submitted to Companies House. Therefore, it doesn’t necessarily fall into line with the standard tax year.
There are also other deadlines relating to when you must pay what you owe. At the moment, you are required to pay within nine months of the end of your company’s accounting period and file the tax return within 12 months. [Read more…] about Limited company contractors – what you need to know about tax