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Start-Up Guide :: Contractor tax and accounting

Published on Mar 8, 2008 |

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The extent of your involvement in the tax and accounting side of IT Contracting will depend a great deal on the choice of company structure you have made.

Umbrella Company Tax Matters

If you have chosen to work via a standard PAYE umbrella company, much of the administrative burden of running your own limited company is removed.

You will simply invoice the umbrella company each week, they then invoice the client. You will be paid a salary (and any allowable expenses) - all national insurance and tax will be deducted on your behalf.

You can read more in our dedicated Contractor Umbrella Company section.

Limited Company Tax Matters

Most IT contractors form their own limited companies. Particulary if your contracts fall outside the IR35 rules, this will be the most tax efficient way of operating.

We would recommend hiring the services of a dedicated IT contractor accountant. You can read more information on How to choose an IT contractor accountant.

The more established firms look after hundreds of other IT contractors, and should take away most of the administrative duties for a monthly fee.

With the limited company route, your invoices (plus Value Added Tax, if your company is registered) will be paid into your company bank account.

Your accountant will set up your 'payroll' - this will calculate your PAYE, Employers + Employees National Insurance liabilities. You will typically pay yourself a modest monthly salary, net of these deductions.

Your accountant should generate a monthly payslip for you to allow you to withdraw these funds from your account.

The rest of your income will typically be withdrawn from the company in the form of dividends.

For IT contractors caught by IR35, they will withdraw money in the form of a deemed salary, plus a 5% expenses allowance.

If you are registered to pay VAT, you should receive quarterly VAT returns from Customs & Excise.

You should register for VAT if your turnover exceeds £67k per annum - from 1/4/2008), and many contractors register regardless of turnover.

You should then pay the VAT you owe within one month of the end of your VAT quarter. Your accountant will typically prepare these returns for you.

At the end of your Company Year, your accountant will produce your Annual Accounts. You will be liable to pay Corporation Tax on all profits made during the year. Payment must be made within nine months of your Company Year End.

In addition, as with all self-employed people, you must also complete a self assessment tax return each year.

This article provides just a high level overview of IT contractor taxation - your accountant will be able to help you with the finer details of small business taxation.