One of the things that draws many contractors to the limited company structure as opposed to working through an umbrella company is the potential tax benefits that can be enjoyed.
Provided your contracts fall outside of IR35 legislation, you can withdraw a portion of your reward in the form of a dividend, meaning neither you nor your company have to pay National Insurance Contributions on that part of your income. Because dividends carry with them a tax credit it means you don’t pay any further personal tax on them until your total income exceeds £42,476 for the current tax year 2012/13.
However, the price you pay for these potential advantages is that you have a significant amount of paperwork to concern yourself with, some of which can be particularly difficult to understand.
One area that is of critical importance is completing your personal tax return correctly.
A decision that all limited company contractors need to make is whether to complete tax returns and other administrative requirements themselves or engage the services of an accountancy services provider to do it for them and you will have to make this decision as well.
Some are reluctant to outsource their paperwork for the extra expense it represents. On top of this, the quality of tax assessment software and similar technological aids is improving all the time, meaning there are tools available to those who want to do it themselves.
However, the availability of technology is only part of the story. What you need to ask yourself is whether it is worth spending a little extra to ensure your tax affairs are in order.
It is up to you to tell HM Revenue & Customs whether or not you need to pay tax on money that is not being taxed at source – it is not HMRC's job to decipher this and let you know.
If you do not have a strong head for figures, hiring an expert to complete your tax return for you is something you may want to give serious consideration to.
UK tax laws can be particularly complicated and unless you submit your return by September 30th you will need to calculate the amount of tax payable yourself, which many people find difficult.
Also, if you make any mistakes and underpay or overpay tax, you could incur fines and have to spend more time on getting it right than you had originally anticipated.
The other issue you need to concern yourself with is deadlines. You need to file your tax return by January 31st following the end of the tax year if you wish to do it online. If you fail to meet this deadline, you will automatically incur a £100 fine.
If your return is more than three months late then a daily penalty of £10 will apply up to a maximum of 90 days. Should your tax returns be between six and 12 months late, you will have further penalties to pay.
The complicated nature of self-assessment tax returns, coupled with the amount of time it can take to fill in the form correctly, is enough to convince many contractors that employing an accountancy services provider is the most efficient way to handle the situation.
It is tempting to consider the savings that can be made by not hiring an accountant to handle your tax affairs, however, it may cost you more in the long run, as you may have to devote a significant amount of time to filling in the form – time which you could be spending on working or sourcing new clients.
Tax is an area where you can afford no mistakes. By entrusting your tax affairs to an expert, you can get peace of mind that a qualified professional is handling the situation for you and at a rate that may work out cheaper than if you were to take time out of your own day to do it.
If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?
If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.
The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).
Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.
Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.
Why it is important for footballers to keep track of their finances and make sure they are signed up to the right type of financial products to suit income and lifestyle choices.
A dream property overseas is a tempting option but to ensure your dreams don't become a nightmare you need to pay careful attention to the legalities of buying home overseas.
If you're thinking of booking a winter sports break to get away this Easter, you might be wondering how you can stick to a budget and ensure you get the best value for money from your break. Follow our top tips to keep your costs down and enjoy a skiing getaway with friends or family during the Easter holidays.
Self-select ISAs allow you to manage your own investments and choose exactly what funds you invest in but you need to assess how often you will trade and how that affects fees.
Enhanced annuities could boost your pension income by as much as 40 per cent
Equity release expert Alex Cross, Head of Product Management from McCarthy & Stone guides us through the important points to consider if you are planning equity release to help with your retirement.
The New Year is a good time to review your pension provisions. Pensions experts McCarthy & Stone run through ten expert tips to help you take control of your future.
Alex Cross, Head of Product Management for McCarthy & Stone outlines ten top tips on what you need to consider when you are drawing up a will.
Latest Company Articles
- What does the 24 month rule mean for umbrella companies?
- Seeing the world and staying safe
- Comparison site caution: top reasons to shop around yourself
- How to form a limited company
- Umbrella vs limited company – which is right for you?
- Coming home after working abroad
- How does the 24-month rule impact those utilising umbrella companies?
- Debt solution jargon-buster
- What does the 2013-14 tax year hold for the FTSE market?
- What allowable expenses are available for the self-employed?