Contractor Tax – A Guide To Your Options

‘Contractor Tax’ is actually a simplistic expression used to describe exactly how contractors account and pay their taxes and National Insurance. There are many companies that use contractors with reg…

‘Contractor Tax’ is actually a simplistic expression used to describe exactly how contractors account and pay their taxes and National Insurance. There are many companies that use contractors with regard to specific duties or to help with special projects. The ramifications for Contractor Tax are wide ranging and need to be considered cautiously. The main options for contractors are:-

Self Employed

A self employed contractor will pay ‘Contractor Tax’ in much the same way as a normal self-employed person, for instance a plumber. A record of the costs incurred, materials etc must be maintained as well as summarised on the annual tax return. The self employed person has to raise their very own invoices as well as send these to customers.

Furthermore the self employed person will have to sign up for VAT in case your turnover is much more than $73,000 (2011/12). VAT is accounted for as well as paid to HMRC every 3 months, it is due even if the bill has not been paid at the time the VAT return is posted.


The main pitfall with this choice is that many companies will only employ a specialist contractor working for a limited organization. HMRC uses tests to establish that the contractor is truly self-employed and not a disguised employee of the client company which has serious implications on the level of Contractor Taxes paid.

Setting Up Your Very Own Company

A business can be started fairly simply by purchasing one ‘off the shelf’. The company will require its own bank account. Once again if the turnover surpasses $73,000 (2011/12) you have the additional problem of accumulating and paying over VAT.

While this option may allow the contractor much more freedom to operate their business the way they would like, the additional obligations make it necessary for more detailed records to be kept and may involve additional expenses. However the quantity of Contractor Tax paid can be reduced through the use of dividends instead of paying a high salary.

The main consideration for contractors is actually passing the tests to exhibit that the person running the company is an independent contractor and not considered a disguised employee of the client business. The failure of these tests could incur additional costs and potentially big penalties around the additional Contractor Tax due. When there is a dispute with HMRC the costs of defending the actual independent contractor status can be high and cannot be reclaimed.

Umbrella Organization

There is a rise in the use of Umbrella businesses when loopholes utilized by Contractors to lower their Contractor Tax were decreased by HMRC.

The way it works is that a service provider becomes an employee of an Umbrella company. Every week or month the contractor completes a time sheet and details their own allowable costs. The Umbrella Company invoices the client company. When the invoice is paid, the actual Umbrella Company will subtract the contractor’s taxes and National Insurance just before payment is made to the contractor’s banking account. This simplifies the entire process and helps to ensure that the right degree of Contractor Tax is paid out.

The extra benefit is the fact that working through an Umbrella Company ensures that there will not be a test to ensure that the contractor is not a disguised employee.

15 thoughts on “Contractor Tax – A Guide To Your Options”

  1. Hey there! I understand this is somewhat off-topic however I needed to ask.
    Does running a well-established blog like yours require a lot of work?
    I am brand new to writing a blog however I do write in my journal daily.
    I’d like to start a blog so I will be able to share my own experience and views online.
    Please let me know if you have any recommendations or tips for new aspiring blog owners.

  2. I blog quite often and I seriously thank you for
    your content. This article has truly peaked my interest. I am going
    to bookmark your site and keep checking for new information about
    once per week. I subscribed to your Feed as well.

  3. That is a really good tip particularly to those new to the blogosphere.
    Simple but very accurate info… Many thanks for sharing
    this one. A must read post!

  4. It’s appropriate time to make some plans for
    the future and it is time to be happy. I’ve read this post and if
    I could I desire to suggest you some interesting things or advice.

    Maybe you can write next articles referring to this article.
    I want to read even more things about it!

  5. Hi to every one, since I am really keen of reading this weblog’s
    post to be updated on a regular basis. It consists of
    nice information.

  6. I’m now not certain where you’re getting your information, however
    great topic. I needs to spend a while studying much more
    or understanding more. Thank you for excellent information I used to be searching for this information for my

  7. Wow, fantastic weblog format! How long have you ever been running a
    blog for? you make running a blog glance easy. The full look of your web site is magnificent, as smartly as the content material!

  8. Whats up very nice site!! Man .. Beautiful .. Wonderful ..

    I’ll bookmark your site and take the feeds also? I am glad to find so many useful information right here within the
    submit, we need work out extra strategies in this regard, thanks for sharing.
    . . . . .

Leave a Reply

Your email address will not be published. Required fields are marked *