Taking a salary and PAYE
Working as a contractor you have a few options: such as working through an umbrella company or setting up and working through your own Limited Company.
If you decide to work through an umbrella company you sign a contract with them and the umbrella company will invoice the end client for work you have done. The client will pay the umbrella company, and they will pay you minus Income Tax and NI.
Some contractors decide to set up and work through their own Limited Company. Depending on the individuals circumstance this may make more financial sense, as it is normally the most tax efficient manner in which to operate (assuming you are not caught by IR35 legislation) . The Limited Company then invoices the end client for the work that has been done. The end client pays the limited company and you get paid from the limited company through a combination of salary and dividend payments.
Taking a salary through a Limited Company
When you register your Limited Company you will be required to name someone as a director and this is usually you. In doing this, you become an employer and an employee of the Limited Company. And, become responsible for recording and collecting taxes (Income Tax and National Insurance) owed from the salary you take.
These taxes are calculated through the monthly payroll (you can choose to do this yourself, or as we advise get your accountant to do this for you) and are set aside and paid to HMRC via PAYE.
When taxes have to be paid
The amount of tax that is collected depends on your tax code. Further information about the rates and thresholds is available on the .Gov website.
Taxes owed must be paid monthly if the combined Income Tax and NI of all employees averages £1,500 or more per month. As most contractors choose to take a minimal salary and the remainder via dividends, this is usually less than £1,500 and can, therefore, be paid quarterly instead.
These payments must reach HMRC within 14 days of the end of the tax month. This usually falls on 5th of each month. Therefore, by the 19th of each month (or 22nd if making an electronic payment) HMRC must receive the money.
Penalties for late payment
It is your responsibility to make these payments on time. However, there may be a time for some reason when a payment is late or not paid in full. If this happens, HMRC can (and mostly likely will) issue you with a penalty.
How much this is outlined in the table below:
N.B: The first failure to pay on time does not count as a default.
A 5% additional penalty of the amount due will be issued if you pay less than what is due and the payment is not made in full after 6 months. This is known as an ‘additional penalty’. A further 5% will be charged if it is not made after 12 months. This is explained in further detail on .Gov website.
Can I appeal?
If you are issued with a penalty charge you are able to make an appeal in writing or online using HMRC’s Online Service. Some of the reasons you can appeal on are:
- data on the returns was incorrect
- ill health
- death / bereavement
An extensive list of some of the grounds for appeal is available on the .Gov website.
If you are looking for advice and assistance on setting up a Limited Company, give us a call on 020 8952 2234 or Request a Call Back and a member of our team will be in touch at a time convenient for you.