rmtypeR

Can anyone explain how income tax is worked out when you're contracting in IT, specifically at what point you pay higher rate tax.

For example, if I were to earn £20/hour that would equate to approx £40,000 over a year therefore would be higher rate tax. But what happens if you only work say 6 months of the year - would you still pay 40% tax during that 6 months that you worked? If this is the case then does anyone know the maximum hourly rate you can earn and stay on the basic rate of tax?

Thanks!

ChefDude

contracting through a limited company incurs you the tax as a person and as a company.

your company will incur tax on profit (main corporation tax) (10%?)
your company will have to pay National insurance for each employee

you as a person will have to pay income tax and also National insurance.

of course, you are the company, so all this comes out of your £20ph

ChefDude

reread the question CD!

you'll pay % related tax on what you earn. you'll pay much less tax for not earning as much.

you'll pay higher rate tax on money earned over about £28-30K

rmtypeR

Cheers Dude!

The reason I ask is that (roughly) £15 an hour would work out at (roughly) £30,000 over a year. If I went up to to £16/hour that would be £33,000 so would I end up taking home less as that extra £1/hour will put me onto the 40% tax rate?

mark1234

Your tax overall is calculated on what you earn in the tax year, not on the rate at which you earn it. Normally as a contractor you'd set up a certain amount per month - I do that and pay myself that every month whether I work or not. That's less than what the company gets as my hourly rate, and under the 40% mark. The remainder stays in the company, and can be taken as a dividend - which doesn't incur National insurance.

Finally, you only pay 40% tax on the amount you earn over the boundary - if you're in the 40% bracket, you will pay nothing on so many thousand, 25% on the next so many thousand, and 40% on the final few thousand.

If you're going contracting, take good advice. Get a decent accountant - they will save you money in the long run. Alternatively look at the umbrella company route - that doesn't give you the tax efficiency/flexibility of a ltd company, but is much simpler, and requires less paperwork.

FlightMan

IR35 anyone?

jowl

being self-employed (although not contracting) my advice would also be:

1. Get a good accountant - even a half decent one shoyuld more than pay for him/her self.

2. Keep uptodate records of EVERYTHING.


Had a very BIG tax bill today!

mark1234

IR35 rather determines whether you can be 'tax efficient' or not - in my case, I'm 90% confident I'm outside IR35, but I'm putting the difference somewhere safe in case 1) I get investigated and 2) the decision is unfavourable.

On the bright side that somewhere safe is earning interest. There's also something to be said for paying yourself a reasonable salary (not tiny) - not taking the p*ss, and thereby putting yourself a distance down the pile when they're deciding who to check up on. But they can come after you up to 6 (IIRC) years down the line.

If your contract falls within IR35, then you have to pay the entire income as salary - that is, attracting tax AND NI, employers and employees.

The litmus test for IR35 is whether you would be considered a permanent employee or not. Basically it's bl**dy complicated, and needs professional assesment. (see previous comments about accountants...)

The other 'Game' is what you can claim as expenses.. anything that you buy on behalf of the company is re-imbursed to you - and comes out of the company tax, NI etc free. Just be sure you're not claiming silly things..

Then there's VAT - you will add vat onto your charges to your clients. You can either pay vat at 17.5% and claim back on certain purchases (for the company), or go on flat rate vat at 12.5%, and not be able to claim purchases. For me that's a huge saving - I think I'd need to buy about 35k of kit / year before flat rate stopped working for me.

Finally, I don't know what you're doing, but 20/hr seems pretty low - for my market segment anyways. Google whack away, there's some good advice out there about setting rates, and what you need to be charging contract vs what you might be earning at the moment to make it work.

Regarding Accountants.. Can't say it enough. GET ONE! I have enough problem keeping up with the paperwork he asks for. If I had to do it myself the fines would be piling up

polarbearit

I'd think if you are earning £15-20/hour an umbrella company may be a better bet than your own ltd company as the tax savings you'll be able to make aren't massive at that sort of rate and the hassle of accounts and paying an accountant probably doesn't pay off...

That said I couldn't recommend you a good umbrella company!

Also I'd think twice about taking any job at that sort of rate if you have proper job at the moment, as by the time you take into account lack of paid holiday/sickness/pension/bonus/life insurance/car you'd probably have to earn less than £17-22k to be better off in the long term as well as having a riskier job status, having to pay more for a mortgage if move etc etc

ChefDude

with an umbrella company, you'll still pay your NI as if you are in a limited company. you don't get ought for nowt!

A good accountant won't always immediately save you immediate money. you may actually spend on an accountant what you save in, say, expenses.

where they do save you money is ensuring you pay all you need to when you should. there should not be unforseen large bills and unexpected visits from the IR and HMC&E

if the IR find a mistake in their investigation of your last 5 years accounts, they can go back a further 5!

the VAT is 7 years, I think.

rmtypeR

Thanks guys - some good advice here.

stevebt

iTrader: (8)

at only £20 an hour i dont think you have to worry about the high tax bracket, as you will have allowances etc to come off !!!