How can Contractors Tackle Tax Issues?

Tax is one of those things that nobody likes to think about, especially when it comes to paperwork. If you’re a contractor, you’ll want to concentrate on what you’re good at – on the skills you sell. Time spent on admin is time when you’re not generating money. Tax can also be confusing, with so many rules and regulations that even professionals argue about it – yet it’s clear that people who understand it well can find ways of hanging on to more of their income. What do you need to know to manage yours?

Operating as a sole trader

How you pay tax depends on how you organise your business. The simplest way to do it is simply by working as a sole trader and paying everything you owe to the Treasury through Income Tax. If you’ve recently started out and what you’re bringing in is less than the low earnings threshold, this can be a practical way to do things, but you will still need to fill out an annual self-assessment form, and you’ll still need to keep all your paperwork in order in case you’re audited. You will still need to pay National Insurance in most cases; if you’re under the threshold, it can be a good idea to make voluntary contributions as these will help to ensure that you receive your full state pension on retirement. If you’re bringing in a larger amount of money, operating as a sole trader may not be the most tax efficient way to do things.

Working through your own limited company

Setting up a limited company involves more paperwork but gives you some advantages by establishing your business as a separate entity from yourself. This means that rather than receiving all your money as income, subject to Income Tax, you can pay yourself the minimum wage and then receive the rest of your money as shareholder dividends, which are taxed at a lower rate. This will leave you having to pay Corporation Tax, but that’s based on how much profit you make after paying yourself and after accounting for legitimate expenses, so you can still be left better off, even though you will have to make an employer’s National Insurance contribution and have to pay for annual professional auditing.

The umbrella company option

If you really don’t like the sound of having all these things to manage, with a risk of being fined if you miss deadlines, there is another option. That’s to sign up with an umbrella company. These companies handle contractor pay as if it were a wage and take care of all tax arrangements on your behalf, aiming to maximise your take-home pay. Payments made to you go directly to them, and you receive money at the end of the month with tax and National Insurance contributions already taken care of, just as if you were in traditional employment.

All these options may sound complicated, but it’s simply a matter of getting used to them. If you just want to focus on doing the work and not worry about anything else, the umbrella company solution is probably the best option for you.

Simon OatesHow can Contractors Tackle Tax Issues?

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