Donovan

IT Contractor Tax: What do I have to pay?

As an IT contractor, two common ways to provide your IT services to clients are either through a limited company or an umbrella company – and each mode of operation will determine your tax obligations.

The UK business landscape is mostly made up of SMEs ranging from micro (0-9 employees), small (10-49 employees) to medium-sized (50-249 employees) companies. The nature of SMEs makes getting external IT contractors a viable option for companies that lack the internal resources to fulfil their IT functions, particularly in this day and age when the rate of technological advancement can be startling, making it hard for non-experts to keep up.

Common IT services engaged by SMEs include network set-up, software support, database management, cloud storage and computer repair, to name but a few. In the UK, particularly in London, there are hundreds of thousands of IT contractors assisting businesses with various IT issues.

Most IT contractors choose to operate through an intermediary such as a ‘personal service company’ in the form of a limited company. The reason is simple – incorporating your IT contractor business as a limited company is tax efficient as it allows you to:

• Split your income between salary and dividends. Dividends aren’t subject to National Insurance Contributions (NICs) and also taxed at a lower rate, meaning you pay less tax.
• Claim tax relief on legitimate expenses

Tax obligations for IT contractors operating through a limited company

For IT contractors operating through a limited company, your main tax obligations are National Insurance Contributions (NICs), Dividend tax, Corporate tax, VAT and income tax. It is, however, best to take advantage of our free initial consultation and discuss your tax obligations with one of our specialist accountants for contractors face-to-face.

National Insurance Contributions (NICs)

National Insurance is a tax system that funds state benefits. At present, if you draw a salary of more than £166 to £962 a week, you are required to pay 12% Class 1 National Insurance rate. For a salary above £962 a week, you pay a 2% charge on the additional earnings.

Most contractors pay themselves by drawing a salary and also declaring dividends. While dividends aren’t subject to National Insurance Contributions, drawing a salary above £166 a week will see you make a contribution to National Insurance as stated above.

There are contractors who consciously pay themselves less than £166 a week to minimise their exposure to NICs. They then take dividends from retained profit to form the majority of their income. It is best to talk to an independent accountant and work out your annual salary if you plan to take this approach.

Dividend tax

After a company pays its Corporate tax, the retained profit can be distributed as dividends to shareholders (which generally means you, as you are likely to be the sole shareholder of your limited company).

Thanks to its three main benefits, many contractors choose to use dividends to form part of their income. The benefits are:

• Dividends are not subject to NICs.
• A £2,000 dividend allowance is provided, meaning the first £2,000 of dividends aren’t taxable.
• Dividends have a lower tax rate than salaries. For tax year 2019/20, dividend tax rates are 7.5%, 32.5% and 38.1% which you must declare on your self-assessment.

You pay dividends by declaring them in the company board meeting minutes and writing up a dividend voucher showing the date, company name, name(s) of the shareholder(s) being paid a dividend and amount of the dividend.

Corporation Tax

Corporation tax is a levy paid on a company’s profits; the figure of which emerges once legitimate business expenses have been deducted from revenue. As mentioned in the article “Business expenses you can claim as an IT contractor”, if you’re a contractor operating outside of IR35, you can claim more business expenses than a contractor in IR35 and the article lists quite a few examples. In the event that you are still unsure about IR35, it’s best to talk to one of our accountants specialising in contractors or check out this post “What is IR35? A brief guide to the IR35 legislation”.

For tax year 2019/20, Corporate tax rate is at 19%, but the government plans to reduce the rate to 17% for tax year 2020/21. The Corporate tax year spans from 1 April to 31 March annually which may or may not be aligned with your company’s accounting period, and in general, you have 12 months from the end of your accounting period to file your return and 9 months to pay any tax due – deadlines are imperative so most contractors rely on a qualified accountant to handle this.

Value Added Tax (VAT)

It is commonplace for contractor businesses to be registered for Value Added Tax (VAT), which is applied to all services you provide to clients. You will be required to submit a quarterly VAT return to HMRC alongside an electronic payment for this sum.

The standard rate for VAT charged to clients is 20% of the service fee, however, you can apply to HMRC for the VAT Flat Rate Scheme, which can be beneficial to your business (depending on its structure and setup) in circumstances where you negotiate a reduced fixed rate of VAT and can keep the difference between what you pay and what you charge your customers.

Current VAT flat rates that can be applicable to an IT contractor and save them money are:

• Computer repair services 10.5%
• Computer and IT consultancy or data processing 14.5%

To join the scheme, your VAT turnover must be less than £150,000 (excluding VAT) a year.

Income Tax

In the UK, if you’re self-employed, a business partner or a director of a limited company, you’re required to file a tax return. You must submit your self-assessment tax returns by 31 October (paper) or 31 January (online), otherwise, you risk being penalised as discussed in our post “Self-Assessment Penalty: What happens if you miss the Self-Assessment Tax Return Deadline?”

As an IT contractor juggling multiple tasks, our advice to you is to use an accountant with proven track records working with contractors to help you manage your tax affairs.

Umbrella Company Tax

For IT contractors who work under an umbrella company, you’re considered as an employee in the umbrella company, meaning the company deducts all taxes and NICs and you receive a net salary have no further taxes to pay. Although it sounds easy, in reality, you are likely to pay more as the monthly fee charged by the umbrella company can be substantial.

Experienced accountants for IT contractors

To speak with one of our professional accountants for contractors to discuss more tax planning tips for IT contractors operating as a limited company in London, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

If you found this interesting and informative, you should check out:

• Tax planning tips for self-employed contractors
• Moving from permanent employee to full-time contractor
• How Xero can help contractors in the UK

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan

Business expenses you can claim as an IT contractor

For IT contractors, staying up to date with the latest developments, technologies and innovations is part and parcel of your job description.

As the IT industry is ever changing, staying on trend is imperative. Likewise, staying informed about the latest developments and changes to your business’s tax considerations and requirements is equally important.

In 2017, public sector contractors’ tax status changed following amendments made to IR35 legislation. Under these reforms, IR35 now stipulates that it is the role of the ‘client’ to ensure that a contract meets the requirements of IR35 categorisation, where previously the onus was on the contractor to ensure that these requirements were met.

From April 2020 onwards, all contractors, operating in both public and private sectors, will be affected by these changes with IR35 consolidating a mandate that requires clients to ensure that any contract entered into is valid under IR35. The contractor tax sphere is, therefore, a complex and complicated paradigm that is constantly shifting and being updated.

Staying on top of these categorisations is hard work, and so too is understanding the various expenses you can claim for now that these classifications are shifting. In this post, our London’s local accountants for contractors aim to discuss the business expenses IT contractors can claim for both inside and outside of IR35 legislation, as well as what to do in the event that you find yourself unsure of your classification.

What is a business expense?

A business expense is a charge your business incurs while operating that is considered “ordinary and necessary” with respect to the running of the enterprise. You can claim these expenses back as deductions from your business’s yearly tax returns and thereby mitigate the overall tax payable on your annual returns.

As a contractor, a business expense is one that is incurred in the performance of your core service or on behalf of your client. You are able to claim back such expenses as deductions, meaning they can be taken from your gross profit before tax is applied. Just as your business’s structure will determine what type of taxes you are eligible to pay, your IR35 status will also determine which expenses you are allowed to claim.

What business expenses can IT contractors claim outside IR35?

As a contractor working outside of IR35, you are classified as operating a legitimate, genuine contractor business and as such, are not deemed to be a ‘disguised employee’ as defined by HMRC’s guidelines. This means that you have greater freedoms with respect to your rights as a business operator, improved tax efficiency and the expenses you can claim.

If your contract falls outside the scope of IR35, you can claim for a number of business expenses that can make a significant contribution towards reducing your overall taxable revenue, such as:

• Costs associated with setting up your company.
• Salaries of company employees (typically just yourself as a contractor – and only where applicable as specified by HMRC).
• Costs associated with an external accountant providing accounting and bookkeeping services.
• National Insurance Contributions (NICs) and contributions to a pension plan.
• Basic costs of operating a business such as business rent, utilities, Internet services, phones, insurance, office costs.
• Equipment costs such as PCs, laptops and software.
• Training expenses if they are directly related to your contract work.
• Subscription to HMRC-approved professional organisations or magazines related to your contract work.
• Costs of entertaining clients or potential clients.
• VAT on expenses if your company is VAT registered.

What expenses can IT contractors claim inside IR35?

As a contractor working inside of IR35 in the private sector, you can claim a fixed 5% to cover the cost of running a company (please note that this isn’t applicable to contractors working in the public sector). They can include:

• Costs of using your home as an office
• Administration and secretarial support
• Accountancy and tax advice
• Business development costs
• Printing, postage and stationery
• Telecoms
• Insurance
• Training costs
• Certain computer equipment
• Bank charges
• Hire purchase payments

Please note that travel and subsistence expenses cannot be claimed.

As per the changes to IR35 legislation with respect to contractors working in public sectors, if HMRC finds you to be working inside IR35 in a public sector occupation this 5% expense allowance cannot be claimed. As for the imminent changes to IR35 classifications in private sector jobs, this will likely transfer also, however, this is yet to be confirmed.

Do note that these lists are not exhaustive, and it is always advisable to consult your accountant with respect to the applicable expenses that you might be able to claim as a contractor business or limited company. If you’d like to know more about the expenses you might be eligible to claim when operating outside or inside the scope of IR35, contact one of our specialist accountants for contractors today.

Accountants for IT contractors

Becoming an IT contractor is as demanding as it is rewarding. While there are some significant benefits to working as a contractor, the financial and fiscal requirements of anyone operating their business can be overwhelming.

To be a successful IT contractor, balancing your business operations and financial responsibilities is key, and this is where TaxAgility can help. Our team of accountants work with contractors from all walks of life and what expenses you can or cannot claim is one of the enquiries we handle daily. If you’d like to know more, contact us on 020 8108 0090 today or drop us a line via our contact page.

If you found this useful, you might also like:

• How Xero can help contractors in the UK
• Moving from permanent employee to full-time contractor
• Tax planning tips for self-employed contractors

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan

Moving from permanent employee to full-time contractor

It’s said that in the UK the numbers of contractors are between 1.7 to 1.9 million, depending on which data source you refer to/ depending on which source you get the data from. What’s certain is that they contribute billions to the UK economy collectively and the number of contractors is set to increase further.

So, there must be a rationale that explains why we’re seeing this trend as it’s rather obvious that becoming a full-time contractor has many benefits. Among them, greater flexibility when it comes to working hours, higher pay rate, a greater degree of market demand and tax benefits (depending on the structure of your business) are often cited as key benefits.

How do I switch from working as an employee to working as a contractor?

With growth forecast for the coming year for contractors and contractor work, particularly in manufacturing, automotive, engineering, design and construction industries, the time is right for you to get ready and take full advantage of the robust contracting landscape in the UK.

While you may be aware of the benefits of contracting, you might not be privy to how you can actually make this move, primarily if you’ve worked in permanent employment all your life. This is why our contractor accountants at TaxAgility put together some useful tips to help make your transition smoother.

Sending out speculative applications

First and foremost, you should begin by testing the waters to gauge whether there is a demand for your services in your area. Doing your due diligence on your target audience/ potential clientele, as well as researching the market and any competitors in your locale is always advisable and considered good practice. One effective mechanism for implementing this is by sending out speculative applications offering your services.

Assuming you send out a high volume of applications, you’ll be able to measure the current state of the market concerning the ways in which various businesses react to your proposal. Don’t be deterred by the number of responses you receive initially, as this is more of a numbers game than anything. The rule of thumb is generally a 10% response rate, depending on the quality of your email and offer.

Even if you don’t receive a contract from this initial interaction, don’t give up. View this as an opportunity to increase your visibility within the marketplace and to companies who might not have been open to the possibility of hiring a contractor in the first place. As long as your details are in their systems, it’s likely that they will contact you when something comes up.

Networking

As a contractor, it’s important to develop a network that can deliver consistent opportunities and work. You can do this by creating a comprehensive networking plan, appearing at business events, distributing business cards or networking online, particularly on the social network, LinkedIn. To be successful, you’ll need to establish relationships within the industry that could potentially provide you with employment opportunities.

In a nutshell, it’s all about getting your name out there. You generally shouldn’t contact clients that you previously worked with when you were a full-time employee for someone else – this is considered poaching and bad etiquette. However, there’s no reason why you can’t reach out to individuals whom you used to liaise with that have since moved company.

Forming your company

When you first begin as a contractor, you’ll have to make the choice between working under an umbrella company, or alternatively, for your own limited company.

We’ve written at length on the differences between umbrella and limited companies in the past, but to put it simply: when you work through an umbrella company they take care of the financial side of things; taking payment from clients then paying you, minus tax, national insurance, and their personal fees.

When you form a limited company, everything (including the financial side) is your responsibility; but you’ll ultimately make more money as you won’t have fees to pay, and you’ll more than likely be operating outside of IR35 legislation if you have established a legitimate contractor business.

Hiring an accountant

If you haven’t already enlisted the services of a specialist contractor accountant at this point, then you should research a suitable financial services provider in your area who can assist you with the operation of your business. A specialist small business accountant is advisable for contractors and freelancers, and an expert in start-ups such as TaxAgility can assist with the transition from full-time employment to full-time contracting.

We’re able to advise you on the requirements for establishing your business, including all aspects of company formation, opening business banking accounts, and registering your incorporated entity with Her Majesty’s Revenue and Customs (HMRC).

To speak with an experienced tax accountant and discuss your potential move from permanent employee to full-time contractor, contact us today on 020 8108 0090 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

If you found this interesting, take a look at:

• How Xero can help contractors in the UK
• Eight top tips for choosing a contractor accountant
• Tax planning tips for self-employed contractors
• Business expenses you can claim as an IT contractor

by Donovan