How does tax change as a contractor?

Chris Andreou

How does tax change as a contractor? Guide

As an employee, you pay your taxes via Pay-as-You-Earn (PAYE). 

Through the system, income tax and Class 1 National Insurance contributions (NICs) are deducted from your salary before you receive it. Your employer will pay Class 1 NICs of 13.8% on salary you earn above the secondary threshold (£8,840 per annum for the 2020/21 tax year).

If you're contracting through an umbrella company, there won't be changes in how you pay your taxes. Just like permanent employees, your taxes are paid through PAYE.

How you pay your taxes changes if you choose to contract through your limited company. Here are the different taxes you need to be aware of:

  • Corporation tax: Tax levied on your company’s profits. The corporation tax rate is 19% for the 2021/22 tax year
  • Income tax: As a limited company director, you may need to pay taxes on the salary and dividends you draw from your business. We cover dividend taxes in greater detail in our guides on understanding dividend taxes and taxes, rates and allowances you need to know.  
  • National Insurance contributions: Limited company directors may also be classed as employees. If you’re paid a salary over the lower profits limit, you’ll have to pay Class 1 NICs as an employee. The company will also pay Class 1 employer’s NICs on salaries the directors receive.
  • VAT: Depending on your turnover, you may need to register and pay VAT.

Get 50% off for the first 3 months.

From £29 a month,you get a dedicated accountant, online accounting software and all your filings managed.

Get Started
No items found.

Read More Guides below:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Guide
Virtual Office

What is a Virtual Office: 7 Things to Know Before Buying

Read more
Guide
Virtual Office

Mail Forwarding Service UK

Read more
Guide
Virtual Office

11 reasons why your online company needs a (Virtual) Office

Read more
View more guides, calculators and downloads here:

How does tax change as a contractor?

Chris Andreou

March 19, 2022

How does tax change as a contractor? Guide
Contractors

As an employee, you pay your taxes via Pay-as-You-Earn (PAYE). 

Through the system, income tax and Class 1 National Insurance contributions (NICs) are deducted from your salary before you receive it. Your employer will pay Class 1 NICs of 13.8% on salary you earn above the secondary threshold (£8,840 per annum for the 2020/21 tax year).

If you're contracting through an umbrella company, there won't be changes in how you pay your taxes. Just like permanent employees, your taxes are paid through PAYE.

How you pay your taxes changes if you choose to contract through your limited company. Here are the different taxes you need to be aware of:

  • Corporation tax: Tax levied on your company’s profits. The corporation tax rate is 19% for the 2021/22 tax year
  • Income tax: As a limited company director, you may need to pay taxes on the salary and dividends you draw from your business. We cover dividend taxes in greater detail in our guides on understanding dividend taxes and taxes, rates and allowances you need to know.  
  • National Insurance contributions: Limited company directors may also be classed as employees. If you’re paid a salary over the lower profits limit, you’ll have to pay Class 1 NICs as an employee. The company will also pay Class 1 employer’s NICs on salaries the directors receive.
  • VAT: Depending on your turnover, you may need to register and pay VAT.

Download our Ultimate Expenses Guide

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
No items found.
No items found.

Download our Ultimate Expenses Guide

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
No items found.
No items found.

What's Inside:

No items found.

No items found.
Download Now ↓

Get Free Advice from an Accountant

Book a free 30 minute call with an accountant. We'll help walk through setting up your business, switching accountant or any of your tax queries. All our fixed price accounting packages come with a 50% off for 3 months.

Read More Guides below:

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
View more guides, calculators and downloads here:
No items found.