Tax Implications and Considerations
Tax Implications and Considerations for Limited Company Contracting
If you’re considering limited company contracting, you need to know what it means to work as a contractor who operates through a limited company. It’s not the same as being a sole trader, and knowing how they differ will help you to find an approach to contracting that works for you.
At Go Limited, we’ve seen for ourselves how setting up a limited company can benefit contractors. But, before you get stuck in, you need to understand the tax implications and considerations of limited company contracting.
What is Limited Company Contracting?
There’s a handful of ways to approach being self-employed, such as being a sole trader or a freelancer, but a lot of people choose to set up a limited company. When you work as a limited company contractor, you set up a separate legal entity, which you provide your services through. You become a director and shareholder of that limited company, which is distinct from you personally. This isn’t the case if you’re a sole trader, as both you and the business are considered to be one.
When you’re limited company contracting, you invoice clients as a business, pay yourself - usually via a combination of salary and dividends - benefit from corporation tax rates, and you can claim a wider range of allowable business expenses. But, it does also mean you need to comply with corporate, accounting and tax obligations, and there are quite a few. The way you approach tax changes significantly when you decide to set up a limited company, in terms of how much tax you pay and limited company tax planning.
Limited Company Tax Planning: Tax Benefits of Operating as a Limited Company
If you do any research into the reasons to set up a limited company, you’ll see a lot of information about the tax benefits. Choosing to contract through a limited company gives you more control over how you're taxed, and it opens up several limited company tax planning strategies. When you’re deciding between being a sole trader or limited company contractor, the way tax is handled is likely to be the deciding factor.
- Tax-Efficient Income via Salary and Dividends - When you're a limited company contracting, you have the benefit of paying yourself via salary and dividends. A lot of limited company contractors pay themselves a small salary - usually, this is just below the National Insurance threshold - and take the rest of your income as dividends. Dividends are taxed at lower rates than salary, resulting in higher take-home pay.
- Limited Company Allowable Expenses - As a limited company contractor, you can deduct legitimate business expenses from your business’ profits before paying corporation tax. This can include things like office equipment, limited company accountancy services, business travel and mileage, and the use of your home as office. By claiming allowable expenses, you reduce the amount of profit that you’re paying tax on, reducing your tax bill.
- Corporation Tax is Lower - Compared to Income Tax, the rate of which you have to pay Corporation Tax as a limited company contractor is lower. Limited companies have to pay corporation tax on profits, which can lead to significant savings, especially for high earners who would otherwise fall into a higher Income Tax bracket.
Challenges and Considerations of Limited Company Contracting
Though there are a number of tax advantages to setting up as a limited company, there are also a handful of things to consider. The financial benefits are appealing, but operating through a limited company does come with a trade-off or two. These are linked to time, growing responsibilities and compliance. These don’t outweigh the financial benefits, but they are challenges to consider before taking the plunge.
- Increased Administration - There’s a lot more administrative responsibilities when you’re contracting via a limited company. You need to maintain accurate company accounts, submit annual accounts to Companies House, file corporation tax returns to HMRC, and maintain a separate business bank account. This can be time-consuming and complex, which is why many contractors choose to hire a specialist accountant to handle everything. When looking at sole trader vs limited company tax comparison, the extra administration is one of the first things people consider.
- Understanding IR35 Legislation - If you’re providing services as a contractor, you must assess whether your work falls inside or outside IR35. These are HMRC’s rules for off-payroll working, and falling inside or outside impacts how your tax is handled. Being inside IR35 can significantly impact your tax position, requiring you to pay like an employee rather than a company.
- Limited Company Revenue Isn’t Personal Income - When you’re a sole trader, everything’s paid into the business is yours. You can use it as a personal income, as you’re not considered to be separate entities. One common mistake people make is thinking it’s the same for limited company contracting, when it’s not. When you set up a limited company, the money belongs to the business until it’s properly distributed, as salary or dividends. You can’t take it out as and when you need to.
Sole Trader vs. Limited Company: Tax Comparison
Deciding between being a sole trader vs limited company contractor can feel confusing, as there’s a fair few things for you to consider. But, once you familiarise yourself with the tax implications and considerations, and the differences, you’re likely to find one route that stands out as being well-suited to your way of operating.
Tax and Financial
As a sole trader, you pay Income Tax on all profits above the personal allowance, along with National Insurance Contributions (NICs). You can deduct allowable expenses, but you’re unlikely to have as many allowable expenses as you would as a limited company contractor. There’s also no option for dividend income.
When you're a limited company contracting, you pay Corporation Tax on profits, and you can pay yourself a combination of salary and dividends for tax efficiency. Dividends taxed at lower rates, with no NICs, which keeps more money in your pocket. You also have a broad range of tax deductible expenses to play with.
Administrative and Legal
If you’re a sole trader, you benefit from a quick and easy setup. You’ll be running your sole trader business in no time. There’s less paperwork - you only need to file a Self Assessment tax return - and there’s no legal separation between you and your business, keeping things simple. But, you’re personally liable for debts and obligations.
When you’re limited company contracting, you have more administrative and legal responsibilities. You need to formally incorporate with Companies House, maintain company accounts and meet legal requirements. This can be time-consuming and complex. But, limited company contracting also offers limited liability, so your personal assets are protected.
Professional Considerations
Being a sole trader is ideal for low-risk, low-income freelancing or side hustles. It’s a way to manage your contracting, but there’s not as much room for growth. Sole traders aren’t always taken as seriously by larger companies, as it can feel as though this is a new or part-time venture for you, rather than a serious, long-term business.
Setting up a limited company works well for contacting, especially if you plan to work with larger businesses. Provides flexibility for business growth and taking on other shareholders, and shows that you’re taking your business seriously. It looks professional, reliable and stable.
Tips for Tax Planning as a Limited Company Contractor
- Work With a Limited Company Accountant - There’s no denying that tax rules for contractors can be complex, especially when IR35 is involved, which is why a lot of limited company contractors work with an accountant.
- Use a Salary and Dividend Split - Often, contractors pay themselves a salary up to the NIC threshold, and then draw the rest of their income as dividends. This reduces overall tax and avoids unnecessary NICs, helping the business to keep more revenue.
- Plan for Corporation Tax - Rather than struggling to come up with the payment at the last minute, plan for Corporation Tax throughout the year. Set aside a percentage of profits in a business savings account, so you're not scrambling when the tax deadline arrives.
- Make Use of Allowable Expenses - There’s a lot of allowable expenses out there, so make the most of them. Track all of your expenses properly, even small recurring costs, to ensure nothing is missed. Even small expenses can add up to big tax savings.
- Understand and Monitor IR35 Status - If IR35 applies to a contract, your tax treatment changes significantly, so you need to keep up with your status.
Operating as a limited company contractor can be financially rewarding, giving you access to lower tax rates, flexible income options and allowable expenses. But, with greater opportunity comes greater responsibility, including staying on the right side of HMRC. At Go Limited, we believe the most successful contractors treat their business like a business, not like a side hustle. Plan ahead, get professional tax advice and stay compliant.
FAQ
Income Tax & Tax Rates for Contractors
How much tax on £70,000 income as a contractor?
If you operate through a limited company and take a combination of salary and dividends, your overall tax liability on £70,000 could be approximately £14,000 to £17,000, depending on how your income is structured. Inside IR35, however, you'd pay income tax and National Insurance similar to a permanent employee.
How much tax does a contractor pay in the UK? / What is the tax rate for a contractor?
It depends on your setup. Outside IR35, limited company contractors usually pay 19% Corporation Tax on profits, income tax on salary, and dividend tax. Inside IR35, you pay PAYE tax and employee National Insurance.
How much do you get taxed as a contractor? / How much tax do contractors pay UK? / How much taxes does a contractor pays?
Expect to pay about 20-25% in total if working outside IR35 and tax-efficiently. Inside IR35, deductions may exceed 30-40%.
How much corporation tax will I pay as a contractor?
The Corporation Tax rate is currently 19% for most small businesses with profits under £50,000. This applies to your company’s profits after allowable expenses.
Tax Responsibilities and Payment Timelines
How do contractors pay tax in the UK? / How to pay tax as a contractor?
Contractors pay Corporation Tax through their limited company. You also report income via Self Assessment. If under IR35, your fee payer deducts tax and National Insurance via PAYE.
Do independent contractors pay taxes? / Do I pay tax on contractor? / Can a contractor pay tax?
Yes, all contractors must pay tax. The structure (self-employed, limited company, umbrella) affects how it’s calculated and paid.
Which tax do you pay as a contractor?
Typical taxes include Corporation Tax, Income Tax (on salary), Dividend Tax, VAT (if applicable), and National Insurance. Inside IR35, you pay PAYE tax and employee NI.
Do self-employed contractors pay Corporation Tax UK? / Do self-employed people contractors pay Corporation Tax UK?
No, only limited companies pay Corporation Tax. Self-employed contractors pay Income Tax via Self Assessment.
How to file tax returns as a contractor?
Limited companies must file annual accounts and a Company Tax Return to HMRC. Contractors also submit a Self Assessment tax return annually.
What tax form do you use for independent contractor?
In the UK, Self Assessment (SA100) is used. Limited companies file CT600 for Corporation Tax.
Do all contractors need a Unique Tax Reference (UTR) number from HMRC?
Yes. If you're self-employed or a director of a limited company, you need a UTR to file taxes.
How to register in HMRC as an independent contractor to pay tax?
You register for Self Assessment or incorporate a company through Companies House, then register for Corporation Tax with HMRC.
Subcontractors & Tax Deductions
How does tax work for subcontractor pay? / How much tax is when a subcontractor?
If you're in construction, tax is often deducted at source under the Construction Industry Scheme (CIS) at 20% or 30% if not registered.
Can a contractor pay tax to a subcontractor? / Does a limited company have to pay tax for subcontractors?
No, contractors don’t "pay" tax for subcontractors but may need to deduct CIS tax and pay it to HMRC on their behalf.
How much time does a contractor have to pay subcontractor tax?
Under CIS, monthly returns and payments to HMRC are due by the 19th of each month following the tax month end.
What if a contractor doesn’t want to give a tax statement? / What if a contractor doesn't pay subcontractor tax?
This breaches CIS rules. You can report them to HMRC. Contractors must provide payment and deduction statements.
Do you have to pay tax on an employee if they're subcontracted?
If they qualify as employees under HMRC rules, yes. Misclassification can lead to penalties.
Does a subcontractor have a PAYE tax code? / How do I sort out tax code as a subcontractor in the UK?
Not usually. Subcontractors under CIS are taxed separately. PAYE codes apply to employees.
How does a sole trader deduct tax off subcontractor? / How do I deduct tax from subcontractors' pay?
You must register for CIS with HMRC and deduct 20% from verified subcontractors' pay before forwarding it to HMRC.
IR35 and Legislation Changes
What are the changes relating to contractors regarding tax and work in the UK?
Recent changes include off-payroll IR35 reforms in the public (2017) and private (2021) sectors, making clients responsible for status assessments.
What does new tax rules mean to contractors?
Inside IR35 contractors now face PAYE deductions. Status assessments are now the client’s responsibility.
How will income tax be calculated for contractors inside IR35 (2020)?
Income tax and NI are deducted at source by the fee payer. No Corporation Tax is due on this income.
Does a contractor inside IR35 have to pay employer's tax and NI?
The fee payer covers employer’s NI. You still pay employee NI and income tax.
Tax Saving Tips
How to minimise your taxes as a contractor / How to save on taxes as an independent contractor?
- Work outside IR35 when compliant
- Split income between salary and dividends
- Claim all allowable business expenses
- Use tax-efficient pension contributions
- Hire a qualified accountant
How to claim back tax on contractor?
Through Self Assessment, you can reclaim overpaid tax or CIS deductions. Submit accurate records and expense claims.
Any other contractor questions
Is it legal to pay subcontractors cash if taxed in the UK?
Yes, but you must still deduct CIS tax (if applicable) and keep proper records.
Do I need to withhold taxes from independent contractors? / Can a company withhold income tax from a contractor?
Generally no, unless under CIS or inside IR35. Otherwise, contractors are responsible for their own tax.
Is life insurance tax free for contractors?
Most personal life insurance premiums are not tax-deductible, but payout is generally tax-free. Relevant life policies may offer business tax advantages.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
