Limited company contractors – what you need to know about tax

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…]

Why It Is Good to Pay Tax

Most people hate paying taxes. They think that it is extremely unfair and they should not have to give the government any money. However, there are some positive ways to look at tax.

Firstly, if you are earning enough money to pay tax, then this is a great thing. It means that you are doing a decent job and getting money for it. You should be proud of yourself for being able to earn this much money.

The money that is paid out in tax goes towards public services. These are things like defence, the national health service and the state pension. Although you may feel that you do not benefit directly from any of those things and begrudge your money going towards things like family allowance and other benefits, there are many pluses. It is rather like having an insurance policy, that you are being forced to pay. Imagine if you had to personally pay for health insurance and a pension fund and security. You may already be paying these things, but most people are not and even those with private pensions will still receive the state pension on top if they have contributed towards it. The tax may not be beings pent on what you feel it should be, but the only way to influence that is to become an MP yourself and lobby for change.

Think about how you might feel if you had no personal pension or state pension, no private medical insurance and no national health, no defence in the country. Also imagine what it would do to the economy if no one received benefits and so there were people begging and starving because they had no money. It is not a good thing and so by doing your bit and paying tax, you are helping making the country a better place to live as well as giving yourself peace of mind.

So try to be happy about paying tax or at least do not get too angry about it because you will see some benefits from it and it means that you are earning a good sum of money. You are doing your bit for society for paying that tax, helping make the place better, helping others and improving things for yourself as well. You could even think of it a a charity donation and so if you do not give much to charity at the moment, you need not feel guilty if you are paying tax.