The UK tax system is not that easy to understand, but things can get more complicated for self-employed contractors and freelancers in the construction, private healthcare, oil & gas, and other industries, because tax deductions do no go through the PAYE system. This means calculations are done differently as well.
Here are some things you need to know about contractor’s tax.
- A limited company contractor with a low salary but high dividend is likely to pay tax on dividends.
- An umbrella company contractor pay income tax on their salary. The same thing is true for contractors caught by the IR35.
- Contractors that complete assignments on the agency payroll are likely to pay income tax on their earnings.
- Tax is also deducted on other sources of income, such as earnings from investments and savings, or income from buy-to-let properties.
When calculating how much tax you must pay, you must first add all your taxable income, including dividends, rental income and employment income. Then, apply the income tax and personal allowance rate bands that are in force for the current tax year. Simply put, subtract personal allowance from your total income earnings.
For the 2013/14 tax year, for example, a contractor’s personal allowance is £9,440 if he is earning under £100,000. Tax is levied on income that is earned in excess of the specified personal allowance.
The basic rate of income tax is 20%, which is applicable to contractors earning above £9,440 but below the higher tax threshold. The higher tax rate of 40% is applicable to those earning above £32,010 and below £150,000 a year, while the top income tax rate of 45% is for contractors with a yearly income of over £150,000.
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