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How Much Tax Do Contractors Pay in the UK

Contracting in the UK comes with its own unique set of tax considerations. As a contractor, you are likely to operate through a limited company, which means you are subject to a variety of taxes, including Corporation Tax, Employer's National Insurance Contributions (NICs), VAT, and Income Tax. Understanding these taxes and how they apply to you is crucial to ensure you are operating in the most tax-efficient manner.


How Much Tax Do Contractors Pay in the UK


Understanding the Tax Landscape for Contractors in the UK

Understanding the tax landscape for contractors in the UK is crucial for operating in the most tax-efficient manner. By understanding the different taxes that apply to you and how they are calculated, you can make informed decisions about your salary and dividends, and ensure you are meeting your tax obligations.


Limited Company Tax

As a contractor operating through a limited company, you are subject to Corporation Tax on your company's profits. The current rate for the 2022/23 tax year is 19%. This means that if your company invoices a client £100,000 excluding VAT over the year and has expenses of £20,000, you will pay 19% Corporation Tax on the remaining £80,000. The company’s Corporation Tax is due nine months and one day after the year-end.


Employer's National Insurance Contributions

Your company will pay 13.8% on any salary you pay yourself over the threshold of £175 per week. However, there is no National Insurance to pay on dividends. This flexibility allows you to structure your income in the most tax-efficient manner. If you work through an umbrella company, you will have to pay the Employee's National Insurance of 13.25% and Employer's National Insurance of 15.05%.


VAT (Value Added Tax)

As a contractor, you’ll more than likely be registered for VAT. You charge this on your invoices at 20%. Most contractors also apply and register for the Flat Rate VAT Scheme, which means you charge 20% but then repay at a lower rate. You are entitled to a discount of 1% during your first year in the scheme. However, the difference you keep is considered a profit and is therefore subject to Corporation Tax.


Income Tax and PAYE

Income Tax can be a complicated subject due to the ability to draw money from your company in two ways: Salary (as an employee) and Dividends (as a shareholder). Any income taken as salary beyond your personal tax allowance of £12,570 (2022/23) is taxed in the following ways:

  • 20% on earnings between £12,571 and £50,270

  • 40% on earnings between £50,271 and £150,000

  • 45% on earnings above £150,000

It is also worth mentioning that once you earn beyond £100,000, your personal allowance will be reduced at a rate of £1 for every £2 of income until it is reduced to zero. By the time you hit £125,000, your personal allowance will have disappeared, meaning that your income between £100,000 and £125,000 will have been taxed at 60%.


Employee's National Insurance Contribution

There is no National Insurance (NI) on dividends. You’ll pay NI on a salary which is 13.25% on anything you earn above £190 per week. After you earn £967 per week, you’ll pay a rate of 3.25% on anything above this limit.


Comparing Taxes: Contractors Versus Employees

Contrary to popular belief, contractors receive relatively modest tax advantages, especially considering the employment rights and security that they forego in order to work flexibly. The tax advantages experienced by contractors are often grossly exaggerated. In particular, the April 2016 dividend tax changes have helped to significantly narrow the comparative tax take from contractors and employees.


Deciding What’s Right for You

There are a number of questions you should ask yourself and consider when deciding on your salary:

  • What income tax and NICs efficiencies do you want to achieve?

  • Do you want to ensure that you retain your right to a state-earned pension and other benefit entitlements?

  • What level of contribution do you want to set for your pension this year?

  • Do you need to demonstrate a certain salary level for any reason e.g. income for borrowing purposes?

  • Do you have other sources of income?



Tax Type

Description

Rate

Corporation Tax

Paid on company profits

19%

Employer's National Insurance Contributions (NICs)

Paid on any salary above the threshold of £175 per week

13.8%

VAT

Charged on invoices, but can be repaid at a lower rate under the Flat Rate VAT Scheme

20%

Income Tax

Paid on salary and dividends beyond the personal tax allowance of £12,570

20% on earnings between £12,571 and £50,270, 40% on earnings between £50,271 and £150,000, 45% on earnings above £150,000

Employee's National Insurance Contribution

Paid on salary above £190 per week

13.25% on earnings above £190 per week, 3.25% on earnings above £967 per week

Dividend Tax

Paid on dividends issued above £1,000

8.75% at basic rate, 33.75% at higher rate, 39.35% at additional rate



How Much CIS Tax Do Contractors Pay in the UK

In the UK, contractors in the construction industry are subject to the Construction Industry Scheme (CIS) tax. This tax is deducted at source from payments relating to construction work, calculated based on labour and material costs. There are three different CIS tax rates applicable to subcontractors: 30%, 20%, and 0%.

  1. 30% CIS Tax Rate: This is the highest CIS tax rate and applies to subcontractors who choose not to register for the CIS. This rate is typically unattractive due to its significant impact on cash flow, so most subcontractors opt to register for the CIS to benefit from a lower tax rate.

  2. 20% CIS Tax Rate: Subcontractors who register with the CIS are subject to a lower tax rate of 20%. This rate is typically chosen by smaller subcontractors, often with a turnover under £30,000. The deductions can be used to offset against their personal tax liabilities or their corporation tax liability.

  3. 0% CIS Tax Rate: Businesses can choose to register for gross payment status, which results in a CIS tax rate of 0%. These businesses, known as gross subcontractors, receive payments in full from their contractors with no deductions. This is beneficial for cash flow in the short term, but these businesses must manage their end-of-year tax liabilities independently.

The CIS tax deduction is calculated by subtracting the cost of materials from the gross amount, which gives a labour amount. Then, the contractor calculates the tax to deduct by applying the CIS tax rate to the labour amount. For example, if the gross amount is £700, the cost of materials is £200, and the CIS tax rate is 20%, the CIS tax deduction would be £100 (£500 * 20%).


In the UK's Construction Industry Scheme (CIS), the tax deductions are calculated before Value Added Tax (VAT) is applied. This is crucial for businesses operating within the construction sector. When a contractor pays a subcontractor for a job, the contractor is required to make a CIS deduction from the subcontractor's pay. This deduction is then passed on to HM Revenue and Customs (HMRC). The CIS deduction is calculated based on the subcontractor's pay excluding VAT. This means that the CIS deduction is made before VAT is added to the invoice.


A CIS tax accountant can provide invaluable assistance for businesses operating in the UK construction industry. From helping with CIS registration and calculating tax deductions, to preparing CIS returns and representing your business in disputes with HMRC, their expertise can help ensure your business remains compliant with CIS regulations and operates as tax-efficiently as possible.


Do Contractors Pay More Tax than Employees?

Well, let’s ask the numbers. Here’s a comprehensive table comparing the tax payments of contractors and employees in the UK:


Income Range (£)

Employee Tax Rate

Contractor Tax Rate

Who Pays More?

0 - 8,632

0%

0%

Equal

8,632 - 12,500

12%

19%

Contractor

12,500 - 14,500

32% (with NI)

19%

Employee

14,500 - 50,000

32%

25.1%

Employee

50,000 - 50,024

52%

45.3%

Employee

50,024 - 100,000

42%

45.3%

Contractor

Over 100,000

47%

49.9%

Contractor

Please note that these rates are based on the tax year 2023/24 and may vary depending on individual circumstances. The tax rates for contractors include both corporation tax and dividend tax. For employees, the rates include income tax and National Insurance Contributions (NICs).


It's clear from the table that contractors generally pay more tax than employees when their income exceeds £50,024. However, between £14,500 and £50,000, employees pay more tax. It's also important to note that contractors have additional costs such as running a company and accountancy fees, which can offset some of the tax advantages. Remember, this is a simplified comparison and individual circumstances can significantly affect the amount of tax paid.


The Role of a Contractor Tax Accountant in the UK


The Role of a Contractor Tax Accountant in the UK

Contracting in the UK can be a rewarding and flexible way to work. However, it also comes with its own set of financial complexities, particularly when it comes to taxes. This is where a Contractor Tax Accountant can prove invaluable. These professionals specialise in the unique tax considerations of contractors, helping them navigate the financial landscape, maximise their income, and stay compliant with tax laws.


Understanding Tax Legislation

One of the key ways a Contractor Tax Accountant can assist is by providing a deep understanding of tax legislation. In the UK, tax laws are complex and constantly evolving. For instance, the IR35 legislation, which aims to combat tax avoidance by workers supplying their services to clients via an intermediary, can have significant implications for contractors. A Contractor Tax Accountant can help you understand these laws, determine if they apply to you, and guide you on the best course of action.


Tax Planning and Efficiency

A Contractor Tax Accountant can help you plan your taxes in the most efficient way possible. They can advise on the best way to structure your income, whether through salary, dividends, or a combination of both. They can also guide you on the use of allowances, reliefs, and deductions to minimise your tax liability. For instance, they can help you understand the benefits of the Flat Rate VAT Scheme or how to utilise the £1,000 dividend allowance.


Compliance and Reporting

Staying compliant with tax laws is crucial for any contractor. A Contractor Tax Accountant can ensure that you meet all your reporting obligations, from Corporation Tax and VAT returns to personal tax returns. They can also help you understand and meet your obligations for National Insurance Contributions (NICs). By ensuring compliance, they can help you avoid penalties and interest charges.


Dealing with HMRC

Dealing with HM Revenue and Customs (HMRC) can be daunting for many contractors. A Contractor Tax Accountant can act as an intermediary, handling any correspondence, queries, or investigations. They can also help you understand and respond to any changes in tax legislation that HMRC introduces.


Financial Planning and Advice

Beyond taxes, a Contractor Tax Accountant can also provide broader financial planning and advice. They can guide you on issues like pension contributions, insurance, and investments. They can also help you plan for your financial future, advising on issues like saving for retirement or planning for periods of downtime between contracts.


Time and Stress Management

Finally, a Contractor Tax Accountant can save you time and stress. Managing your taxes can be time-consuming and stressful, particularly if you're not familiar with the intricacies of tax law. By outsourcing this task to a professional, you can focus on what you do best - your work as a contractor.



In conclusion, a Contractor Tax Accountant can provide invaluable assistance to contractors in the UK. From understanding complex tax legislation to ensuring compliance and providing financial advice, their expertise can help you navigate the financial landscape with confidence. By engaging a Contractor Tax Accountant, you can ensure that you're maximising your income, staying compliant with tax laws, and planning effectively for your financial future.

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