A Short Guide To Tax Considerations For Contractors
Issues of tax are undeniably more complicated for freelancers or contractors in the UK than they are for people who are regularly employed. Read our helpful guide for the tax issues you should consider if you're a freelancer. One of the first things you need to do when sorting out your tax is to determine what kind of freelancer you are: this means working out whether you're self-employed as a sole trader or whether your business means you need to register a company.
You also need to consider the issue of Value Added Tax to work out if you need to register for it or not. You won't have to register for VAT if you're on low to average earnings, but if you're a high earner on over 64,000 a year then you need to register for it. This is something you can get an accountant to help you do and you might want to separate the VAT when sending invoices. This is so you can collect and claim for VAT.
National Insurance contributions are another tax issue you need to make arrangements for. Specifically, you need to make plans to pay Class 2 NI contributions, unless you have very low earnings which exempt you from paying it. Most people set up a direct debit with Her Majesty's Revenue and Customs to pay for it on a monthly basis. If you earn a lot, you'll also have to pay higher rate NI contributions, which lower earners can pay on a voluntary basis.
Self-assessment tax returns are one of the big issues for UK freelancers and contractors. These are based on the previous financial (which runs from April - April) and you will be charged tax based on how much you earned in that financial year. You need to make sure to keep a record of all your earnings and all costs related to your work so you can input them into the form and help HMRC come up with an accurate figure as to how much tax you owe.
One last thing to consider is how you'll be paying your tax bill. It can be a good idea to have a cushion of money put by in case the following tax year is a bit lean and you don't earn much as you'll still be expected to pay the tax bill for the previous year. It can also be wise to put aside money throughout the year so that when tax time rolls around, you'll have enough saved that you'll be able to pay is easily.