Here are the key business and personal tax rates and allowances that affect contractors – for the 2016/17 tax year.
Capital Gains Tax
The rates of Capital Gains Tax were reduced from April 2016 onwards.
Basic Rate – taxed @ 10%
Higher Rate – taxed @ 20%
The annual CGT exemption (before any tax applies) remains at £11,100.
If you dispose of eligible business assets (such as a company), Entrepreneurs’ Relief may apply @ 10%, subject to a lifetime allowance of £10m.
This tax is levied on the profits of all companies – the prevailing rate is 20% for companies of all sizes.
The dividend tax system was changed entirely from April 2016. The rates are as follows:
Basic – £0 to £32,000 taxed @ 7.5%
Higher – £32,001 to £150,000 taxed @ 32.5%
Additional – £150,000 + taxed @ £38.1%
Find out more about how dividends are taxed since the April 2016 dividend tax hike.
Income tax is applied to all salaries (either the salary you pay yourself from your own limited company, or your umbrella company salary).
The ‘Personal Allowance’ (the amount you can earn before any taxes are applied) is £11,000.
If you earn £100,000 or more during the 2016/17 tax year, the value of the Personal Allowance is eroded by £1 for every £2 you earn above the £100,000 mark.
After taking the Personal Allowance into account, the tax bands are as follows:
Basic – £0 to £32,000 taxed @ 20%
Higher – £32,001 – £150,000 taxed @ 40%
Additional – £150,001 + taxed @ 45%
The IHT threshold remains at £325,000, after which all assets are taxed at 40%.
Income tax in all but name, NICs are applied to all salaries above the relevant threshold. If you earn £8,060 or less, there are no NIC liabilities whatsoever.
Employees’ NICs are charged at 12% on income between £8,060 (£155 per week) and £43,000 and at 2% above £43,000.
Employers’ NICs (paid by your limited company) are charged at 13.8% on salaried income of £8,112 or more (£156 per week).
Value Added Tax
The current standard VAT rate is 20%
You must register if your business has a turnover of £83,000 or more (of you can register regardless if you wish). Find out if you need to register your company.
The Flat Rate VAT scheme has a turnover limit of £150,000 (this scheme is often the most appropriate for small contractor companies).