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Stay on the right side of HMRC as a contractor

by Kobus Van den Bergh | Jul 24, 2017
  • When it comes to filing your tax returns, things can get a little tricky. All contractors must declare their earnings to HMRC and because it’s not just as simple as being an employee under PAYE with salary deductions automatically taking place, it can be quite confusing for first-timers. As with many things, a little help goes a long way. Below is some key information on paying tax as a contractor in the UK.
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    Don’t leave your Self Assessment to the last minute

    Regular employees have their tax deducted automatically from their salaries, wages, pensions or savings, but if you’re a contractor, a director of a limited company or earn an income in addition to your salaried employment, you must register and file your Self Assessment tax return.

    As a taxpayer living in the UK, it’s your responsibility to register with HMRC and complete a Self Assessment tax return. This can be done online or over the phone. Failing to register will result in significant penalties, so if you think you might have to register for Self Assessment, speak to an accountant to make sure.

    Filing your Self Assessment with HMRC can be complicated and will likely get in the way of you focusing on your work. The good news is that we are tax experts in the UK who can handle this administrative burden for you.

    Self Assessment tax returns are due by 31 January each year, for the preceding tax period (for example, for the tax year 6 April 2016 to 5 April 2017, by 31 January 2018). It is therefore recommended to finalise each year’s tax return well before the Holiday period in December.

    Get your documents in order

    After you register for Self Assessment, you will need to fill out your tax return form. However, before you go on ahead and do this, it’s always best to get your documents in order.

    Here are examples of the types of income you’ll need to declare to HMRC:

    • Self-employed income
    • Dividend income
    • Interest earned
    • Capital gains
    • Rental income form property owned

    This complex task can take time and the last thing you want to do is file late or incorrectly. If you’re not sure, get some help and you’ll be able to sleep easy knowing that all your deadlines will be met and your submissions will be correct.

    Slash your tax by using a limited company

    If you are a high earner, with income over £40,000 per year you could save tax by using a limited company. You can structure your earnings in a more tax-efficient way, as the Corporation Tax rate in the UK is lower than the personal tax rate to reduce the taxes on your earnings. As the owner of a limited company you are able to decide how to draw dividends and what you pay yourself as salary from your company (as you will become both the owner and an employee at the same time). In this way operating a limited company can offer more take-home pay than being a standard employee or being self-employed.

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    When structuring your earnings, make sure you seek experienced professionals who will maximise tax and operational efficiency. An experienced and reputable accountant will help you structure your payments and advise you on how to:

    • Set your salary at an optimal level – this is fundamental to reducing your tax liability
    • Claim allowable expenses through the company
    • Register for Flat Rate VAT (FRV)
    • Contribute a portion of your income to a pension
    • Maximise your dividend payments up to the higher rate tax threshold
    • Invest any retained earnings in the company
    • Keep the retained profits in the company for as long as possible

    Let our expert UK tax advisers make your tax filings a breeze. Give us a ring on +44 (0) 80 8141 1643 or email us on accountinginfo@1stcontact.com 

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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