When your tax bill comes in, do you want to be caught out?
This is called “bill shock”, and it’s the reaction of many a newly qualified contractor when they get their first set of accounts and discover the amount they owe in tax. When you work for yourself, you are responsible for corporation tax, VAT, and of course, your own personal tax bill. With the right kind of budgeting, you’ll never have to be caught unawares by your tax bill ever again.
The important taxes
- Corporation Tax: 19% (up to £50,000 of profits); 25% (above £50,000), or a blended rate for profits between £50,000 and £250,000. Corporation tax must be paid 9 months after your accounting year-end.
- VAT: You may need to register for VAT. If you do, budget to put 15.5% (Flat Rate Scheme) or 20% (Standard Scheme) of your invoice value to one side. VAT is paid quarterly.
- Personal Tax: If you pay yourself dividends, then you need to budget for personal tax on those dividends. These are taxed at either 8.75% (basic rate) or 33.75% (higher rate). You pay this tax as part of your Self-assessment tax return, which is due on January 31.
- PAYE/NI: If you are working inside IR35 or paying yourself a salary, you’ll need to budget 20% – 40% of your earnings.
On average, a contractor working at £500 a day for 48 weeks, working outside IR35, can expect to pay between £30,000-£40,000 in tax each year.
Top tips on budgeting for tax
- Set aside 30–40%: Transfer this amount from every invoice you get paid into a separate savings account.
- Use FreeAgent: We include FreeAgent with our Solo package so you can always see what you owe in tax. It also shows you your estimated tax figures in real-time, so you’ll never be taken by surprise again.
- Allow for no income: You should plan for at least 4–8 weeks per year when you have no income at all.
- Make payments on account: If you are completing a Self-assessment tax return, you can reduce your January panic by paying half your tax bill halfway through the year.
Mistakes to avoid
- Spending all your income: Just because the money is in your business bank account doesn’t mean it’s all yours to spend!
- Disregarding VAT: If you don’t pay your VAT bill on time, there’s an automatic 5% penalty added to the amount due.
- Underestimating the effect of IR35: If your contract is inside IR35 your tax bill goes up massively.
We can help
- Personal tax planning: At Bright Ideas Accountancy, we provide personal tax planning to ensure your tax planning is tailored to suit your needs.
- FreeAgent for business: We include FreeAgent with our Solo package for you to see in real-time what your liabilities are at any point in the year.
- Same-day support: At Bright Ideas Accountancy, you’ll never have to Google the term “estimated corporation tax” again. We have a team of experts here to answer all of your queries within the same day.
Don’t let your taxes catch you out
Find out how we can help with our free consultation today and make sure you can enjoy all the benefits of contracting.
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