TAXATION CONSIDERATIONS
JPC FINANCIAL LIMITED
FINANCIAL LIMITED
THE COMPLETE BUSINESS MANAGEMENT SERVICE
CONTENTS
As a contractor you will find that no tax is deducted from your salary at source, as it was when you were an employee. This does not, unfortunately, mean that you don’t have any tax to pay! On the contrary, it puts the onus on the contractor to calculate how much he ought to pay and when he is due to pay it.

WHAT TAXES HAVE TO BE PAID?

PAYE (Pay as You Earn)
PAYE, or Schedule E Income Tax, is due to be deducted by the company from the salary of the contractor. This tax theoretically must be remitted to the Inland Revenue monthly, however, it is often possible to get Inland Revenue Approval to remit this tax quarterly, or annually each April.
NI (National Insurance)
Class 1 NI contributions must be deducted from the contractor’s salary each month. In addition, the contractor’s company is liable also to pay an employer’s NI surcharge on each month’s salary. The payment of these contributions to the Inland Revenue is made at the same time as PAYE contributions mentioned above.
ACT (Advance Corporation Tax)
ACT is due to be paid on dividends drawn from the company by the contractor. The ACT falls due on the 14th day after the end of the calendar quarter in which the dividend was declared. If your company’s year end does not fall on a calendar quarter end date, then your year end will form a fifth accounting date for ACT purposes.
MCT (Mainstream Corporation Tax)
MCT is payable on the profits of the company for an accounting period after deduction of all allowable expenses. MCT is reduced by ACT already paid and is normally due nine months after the end of the accounting period of the company.
HOW IS THIS TAX CALCULATED?
To explain this let us look at a rough guide, using the example of an unmarried contractor earning £1,000 per week for a 46 week year, drawing a £15,000 gross salary per annum, being registered for VAT and having other allowable expenditures as stated.

 

£

£

TOTAL INCOME
(Net of VAT) (46 x £1,000)

  

46,000

 

Less: Director’s Gross Wages

15,000

 

  

Employer’s NI Contributions (approx.)

1,560

 

  
   

(16,560)

 

29,440

 

Less: General Expenses (all allowable)

  

(5,440)

 

Net Profit per before Corporation Tax

  

24,000

 

Mainstream Corporation Tax Charge

  

(6,000)

 

Net available for dividend purposes

  

18,000

 

Let us assume the company declares a quarterly net dividend of £4,5000. (Tax=one quarter of the net dividend drawn, or 20% of the net dividend plus the tax).
Corporation Tax
Advanced Corporation Tax would be accounted for as follows:-

 

£

30th June

1,125.00

30th September

1,125.00

31st December

1,125.00

31st March

1,125.00

Total

4,500.00

 

Mainstream Corporation Tax Charge Calculation
 

£

  

Total Tax Payable

6,000.00

(will reduce to £5760 in 96/7)

Less: ACT Paid

(4,500.00)

  

MCT to pay

1,500.00

  
PAYE AND NATIONAL INSURANCE
 

£

Gross Pay:-

15,000

Less Free Pay: (Tax Code 352L)

(3,525)

Taxable Pay

11,475
   

Tax thereon @ 20% / 25%

2,709
NATIONAL INSURANCE
 

£

(£1,250 per mth) Employee’s contribution

1,259

Employee’s contribution

1,530
 

2,789
So total tax payable by this contractor would be:-

 

£

PAYE

2,709

NIC

2,789

ACT

4,500

MCT

1,500

TOTAL (25% of income)

11,498

There may be an uplift due to higher rate taxes on total personal income but this amount can be mitigated by various means - speak to your financial adviser.

Let us now compare this situation with the same individual being employed at a gross salary of £46,000, bearing in mind that the individual will now not have to bear the employer’s National Insurance Contributions costs:-

 

£

Gross Pay

46,000

Less: Personal Allowance

(3,525)

Taxable pay

42,475
   

Tax @ 40%

(42,475 Less £24,300 = £18,175 x 40%)

7,270

Tax @ 25% on £21,100

5,275

Tax @ 20% on £3,200

640

Total Tax

13,185
   

National Insurance:

Employee’s contributions only:-

2,046

Total Tax & NI Payable

(33% of income)

15,231
As compared with £11,498 in the Limited Company situation it can be seen that the salaried employee pays £3,700 per annum more in Tax and National Insurance Contributions than the Limited Company computer contractor. Which would you prefer?
WHEN IS THE TAX PAID?
Assuming the contractor in our example commenced work on April 1, 1995 the tax would be paid as follows:-

 

£

TOTAL

PAYE

    

May 14 1995 to April 14th 1996 (monthly)

458.00

5,498.00

ACT

    

July 14, Oct 14th (1995), Jan 14th, April 14th (1996) (quarterly)

1,125.00

4,500.00

MCT

    

Dec 1996 - MCT

1,500.00

1,500.00
   

11,498.00