How much salary should I pay myself as a Limited Company contractor?

How much salary should I pay myself as a Limited Company contractor?

Making the right choice on the level of salary to draw as a Limited Company director and contractor is one of the more important decisions to take. Surprisingly though it’s not just an annual decision, taken at the beginning of each tax year, but one that should be revisited whenever changes occur in your circumstances.

To fully understand the mechanics affecting the choice of salary requires a working knowledge of Income Tax (PAYE), National Insurance and IR35, Corporation Tax and the rules concerning National Minimum Wage and that’s something your specialist contractor accountant can help you with. But to avoid a detailed technical analysis we can whittle these down to a short list of considerations:

I’m subject to IR35, so it makes no difference

If you are subject to IR35 your eventual salary is determined according to the defined rules of IR35; however you retain the choice of how much to take during the year that affect the amount of tax payable and when it is payable.

The Employment Allowance (EA) was introduced in April 2014 to provide a deduction of up to £2,000 from the Employer’s NI payable by your company. However EA is not available to any part of your salary determined as a deemed payment under IR35 and so only deductible against Employer’s NI payable on normal salary. You should therefore set a level of normal salary that utilises the EA limit. For 2015/16 the level of salary that fully utilises EA would be £22,552.

The second choice concerns timing of tax payments. Taking a monthly salary that utilises EA will result in quarterly PAYE and NI payments, whereas the tax on the deemed salary is payable at the end of the tax year. So it would appear better to keep your salary low enough to utilise the EA and leave the IR35 balance to be determined at the end of the year and pay PAYE and NI much later.

Although one point to appreciate is that any money taken from the company on account of a final IR35 salary will be a loan and subject to beneficial loan interest rules when the loan exceeds £10,000. A minor point not to be overlooked.

What about National Minimum Wage (NMW)?

New rules introduced in March 2015 mean that any failure to pay NMW can result in a fine of £20,000 per employee. Ok, this is unlikely to be an issue in practice, but HMRC can take action where the NMW rules apply and such a fine is an attractive motivator.

NMW only applies to Limited Company contractors who are the directors of the company where there is a contract of employment, and to the company’s employees. If you are one of the few contractors that has issued a contract to yourself then you should pay the NMW. Since October 2014 this is £6.50 and from October 2015 it is expected to be £6.70.

NMW has no influence over IR35 status and can be ignored where no contract of employment exists.

Are you thinking of pensions?

The level of salary taken affects the level of personal pension contributions you are able to make that take advantage of the tax benefits. If you pay pension contributions then you should seek advice from your financial advisor on the minimum required level of salary to support the tax benefits.

I’m outside IR35, pay enough to support my pension provisions and don’t have a contract of employment

Congratulations, you have complete freedom of choice. You can set any level of salary that now suits your personal circumstances and your view on tax. The next step in this discussion assumes that you want to minimise tax. If that’s not your driver then select any level of salary that you want and can be supported by the company’s income.

Most contractors are aware that dividends incur less tax than salary because NI does not apply to dividends. However there is a minimum level of salary that should be taken that overall reduces total tax (Income Tax, National Insurance and Corporation Tax). That minimum level used to be linked to the thresholds when NI became payable, however since the introduction of EA the best level of salary is linked to your personal tax allowance.

Personal Allowances (or your tax free allowance) changes every year. For 2015/2016 most contractors start off with Personal Allowances of £10,600. This typical level may be reduced if you have tax liabilities from earlier years that are collected via your tax code or you have any taxable benefits in kind. If you are not sure then obtain a copy of your tax code calculation from HMRC.

Your Personal Allowance is a tax free allowance and is set against your total income. So if you have other income such as interest or rental income then deduct the gross value of that other income and you are left with your available personal allowance.

The level of your available Personal Allowance is often the best level for your salary that achieves the least tax liability overall.

Let’s explain that with some examples:


  • Personal Allowance is £10,600
  • No higher rate tax (but only to keep it simple)
  • No other income
  • Profit after expenses but before salary £40,000
  • Available dividends are declared
example salary

Conclusion: Salary at Personal Allowance is the least tax

Now let’s compare the result where Personal Allowances are £8,000 because of underpaid tax brought forward

Assumptions as above except:

  • Personal Allowance is restricted to £8,000

 example salary 2

Conclusion: Salary at Personal Allowance is still the least tax


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

‘The Budget for Britain: the comeback country’

The Budget for Britain

In Monday’s blog we looked ahead to what we thought this week’s Budget might bring for contractors and freelancers. Osborne had already made it clear that there would be “[N]o giveaways, no gimmicks, a Budget for the long-term” and it certainly proved to be a steady Budget. Yesterday the Chancellor was at pains to stress that the UK is experiencing true national recovery, and with the highest rate of employment in history and businesses being backed, the Coalition is confident their measures are making work pay.

A Budget that “backs small business owners”?

So what does yesterday’s announcement mean specifically for contractors and freelancers…

Income Tax personal allowance

Back in the Autumn the Government announced that the Income Tax personal allowance will increase to £10,600 as of April 2015. This means the basic rate limit will be £31,785 and therefore the higher rate threshold above which individuals pay 40% Income Tax will be increased to £42,385. The personal allowance will rise to £11,000 by 2016/17 with the higher rate subsequently rising to £43,000.

National Insurance upper earnings and upper profits limits will increase to stay in line with the higher rate threshold. The basic, higher and additional rates of Income Tax for 2015-16 will remain at their 2014-15 levels.

Capital allowances

It had been expected that the Chancellor might announce an extension to the £500,000 limit to the Annual Investment Allowance due to fall back to just £25,000 on 1 January 2016 but this didn’t materialise in yesterday’s Budget.

Travel and subsistence claims for workers engaged through Employment Intermediaries (Umbrella companies and possibly PSCs).

The 2014 Autumn Statement announced that the Government would review with the intention of restricting the use of overarching contracts used by some temporary workers, and their employers to claim tax relief on travel and subsistence (T&S) expenses.

Yesterday’s Budget revealed that, with effect 6 April 2016,  Government intends to implement the conclusions of a consultation which is likely restrict T&S relief for workers engaged through an employment intermediary, such as an Umbrella company or a personal service company, who are also under the supervision, direction and control of the end user. They intend to force Employment intermediaries to provide workers with greater transparency on their terms of employment, including what they are being paid.

The springboard for these plans has arisen as HMRC seek to level the playing field between employment businesses that lower their costs by taking advantage of these arrangements, and those that don’t. But Osborne did say that the Government would continue to protect those genuinely self employed.The period of consultation will determine the finer details of the eventual proposals to restrict tax relief and we’ll post more about what that means for our clients as the plans unveil.

What else is there for contractors and freelancers in this year’s Budget?

Well, there are some ups and some downs for contractors with a range of benefits and penalties coming out of this Budget. The announcements to help savers will benefit most contractors and Osborne mentioned several times that this Government have made sure it pays to work. And with planned investment in infrastructure across all parts of the UK, this will be welcome news for contractors, especially in the North and South West.

Other headlines contractors will be interested in 

  • The annual Self-Assessment Tax Returns (SATR) will be abolished and replaced by online tax accounts. Osborne cited that the self-employed should be working for themselves, not the taxman. This news was particularly welcomed by IPSE, the Association Independent Professionals and the Self Employed who welcomed “a more flexible returns system to replace the current outdated model”.
  • Government will review Entrepreneurs Relief (ER) and this could impact on how contractors can extract cash efficiently from their Limited Companies.
  • A new personal savings allowance means the first £1,000 of savings income will not be taxed.
  • A fully flexible ISA that won’t penalise savers for withdrawing their own money or replacing it throughout the year.
  • A new Help to Buy ISA meaning first time buyers will get £50 from the Government for every £200  they save.
  • Tax relief on lifetime pension pots will fall from £1.25m to £1m but will be indexed from 2018 to protect those in place.
  • As predicted, investment will be made into the oil and gas industry, creating jobs for contractors in that field. The Chancellor stressed the importance of taking action in this area to protect the future of the industry.
  • TV, film and gaming tax credits will benefits contractors and freelancers working in the UK’s creative sector.
  • The freeze on petrol prices promises “£10 off a tank with the Tories” while alcohol duties will be cut.

Osborne hailed this as “[T]he Budget for Britain: the comeback country”. Will yesterday’s announcements make the sun shine for you? Let us know your thoughts.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

‘No giveaways, no gimmicks, a Budget for the long-term’ – but will the 2015 Red Box budget for contractors and freelancers?

Will the Red Box budget for contractors and freelancers?

The Budget is this Wednesday and in true pre-Election fashion it is unlikely it will be full of radical announcements.

I predict it will consist of Osborne telling us what he thinks we need to hear and not what he really intends to do, if he still has his job in the second week of May.  Could we be looking at two Budgets in one year?

The Conservatives billed themselves as being ‘the party of small business’ but, in reality, very few independent professionals will have felt any benefits from policy changes. In fact, the Government could be criticised for not delivering enough to empower freelancers and contractors. In the final pre-Election Budget it is uncertain, but also unlikely, that contractors will see significant changes in Osborne’s statement.

A number of tax changes have been announced already and have been under discussion. To the extent that they are not contentious, or at least acceptable to the other major political parties, they will be included in the Finance Bill and will be enacted before the end of this month.

The main, eye catching, announcements are likely to be changes which the Chancellor would like to make in the next Parliament if the Conservatives are in power, or are a member of a Coalition, in that Parliament; as there will then be less than six weeks of campaigning before the Election on Thursday 7 May.

The tone, and content, of the Budget is going to be highly political and will have a strong influence on the campaign not least because the Chancellor is the key strategist of the Conservative party. We know that contractors and freelancers are the lifeblood of the UK economy and they have an important role in rebuilding the economy. Inevitably there won’t be many people whom the Budget doesn’t affect one way or another so we’ve picked out some of our predictions that will be of particular interest to freelancers and contractors.

What is likely to come up in the Budget 2015 specifically affecting contractors and freelancers?

More measures to tackle tax evasion and tax avoidance

We can definitely expect that more tough measures will be announced, for next Parliament, to provide criminal sanctions for tax evaders and their advisors, whatever their role. Initiatives such as a ‘diverted profits tax’ targeting multinational companies who have been judged to have shifted profits overseas to avoid tax are expected to be implemented.

Support for key industries

It is expected that Osborne will unveil measures to support the North Sea oil and gas industry which will be welcome to many contractors who work in this industry, from engineers to IT specialists and finance professionals. It is hoped that a boost to British manufacturing will help rebalance the economy and protect the livelihood of contractors already in the industry while creating demand for their skills.

Tax simplification

The Office of Tax Simplification (OTS) has suggested many changes in a variety of areas that have previously been adopted but it has suffered from a lack of resources and is due to wind up at the end of this Parliament. The Chancellor may decide to put the OTS on a more permanent footing and properly resourced if the Conservatives win the election. If so we can expect more changes to arise in the coming Parliament to simplify taxation especially for small businesses and individuals.

Travel and subsistence claims for Umbrella workers

This is still high on the political agenda but the highly anticipated clampdown on travel and subsistence (T&S) expenses may not happen in this Budget. The concern was originally raised by MPs accusing Umbrellas of exploiting workers but FCSA disagree and have plead to MPs that imposing these proposals would threaten the £2.8bn of income tax and National Insurance Contributions generated by Umbrella service providers  HMRC have already stated that “any proposed measure to address this misuse will not come into effect until 2016 at the earliest”.

We can expect a restriction rather than a removal of tax relief for workers, with a curtailment of T&S expenses more likely from April 2016. The Chancellor’s statement last Wednesday, following the closure of HMRC’s consultation, will “inform the government’s decisions at Budget ‘15 on how best to address this avoidance.”

Personal Allowances and income tax thresholds

The Allowance for the average person went up from £6,475 to £10,000 over this Parliament, and the Autumn Statement announced an increase to £10,600 from 6 April 2015. A further increase is possible, perhaps by an additional £200, but unlikely, although there are hints that the Chancellor may announce future target increases.

It’s possible that the Chancellor may extend the basic rate threshold so that, allowing for allowances that the basic rate band moves closer towards an intended goal, announced in the Autumn Statement, of £50,000.

Inheritance Tax

Inheritance Tax is currently levied at 40% on estates worth £325,000 and above. There are hints of a return to the promise of increasing the Inheritance Tax nil rate band to £1 million and clarifying if the limit is per person or per married couple or civil partnership. It is thought Osborne will announce plans which involves the person inheriting rather than the deceased’s estate, being taxed. This would be popular among high earning professionals including contractors who may currently view Inheritance Tax as an inhibitor to aspiration and ambition.

Entrepreneurs’ Relief

The cost of Entrepreneurs’ Relief (ER) in 2013/14 is £2.9bn: three times higher than HMRC’s estimated cost. Unexpected changes were announced in the Autumn Statement and it is possible that further announcements on ways to limit ER will arise.

Capital allowances

The Annual Investment Allowance is currently £500,000 but is due to fall back to just £25,000 on 1 January 2016. It is possible that the Chancellor may promise to extend the £500,000 limit if the government is re-elected.

Research and development tax credits

Changes to the system for claiming research and development R&D tax credits were announced in the Autumn Statement introducing a new advance assurance service for small companies from the autumn. Further assistance may be announced to help small companies undertaking R&D perhaps in simplifying the definitions of applicable costs.

Pensions and pensioners

The Prime Minister has announced that he wants to protect pensioner benefits. But there may be announcements about tax relief for pension contributions and limiting the contributions possible or the scope to only basic rate tax relief.

Watch this space

It is hoped that the 2015 Budget will finally address the realities faced by the freelancer and contractor community.The Federation for Small Business has been calling for policies to help small businesses grow, through tax reforms and sensitive changes to Minimum Wage rules. Of course Osborne needs to leave some rabbits in the hat for Wednesday and it may be that initiatives such as a further reduction to Corporation Tax (which would be welcomed by Limited Company contractors) are saved for the Conservatives’ Election manifesto.

Whatever happens in the 2015 Budget, we’ll publish our views on what it means for contractors after the announcement. Make sure you follow us on social media for the latest updates:

What do you hope to see in this year’s Budget?

While we wait for the Budget, are you ready for the 2014/15 tax yearend? Download our new guide and get the most from being a contractor.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Penalties – company accounts and Corporation Tax

Penalties – company accounts and Corporation Tax

Accountants often talk about penalties and interest being incurred if documents are filed late, but we find that people rarely know the actual facts and figures that can be involved.  This is quite a large subject, so in this blog we’re concentrating purely on a general overview in regard to company accounts and CT returns.

You should also note that sometimes filing deadlines vary if a set of accounts is shorter or longer than a year, so check your specific deadlines with your contractor accountant.  This is a general outline only…..

Companies House

If your company accounts are filed late, Companies House will issue a penalty notice as soon as they are finally filed.  The penalties they will impose are as follows:

  • Under one month late – £150
  • More than one month but less than three months – £375
  • More than three months but less than six months – £750
  • More than six months – £1,500

These penalties will double if the accounts are late for a second year, so they can quickly become quite considerable.


HMRC – Corporation Tax return

A CT return covers a period up to a year, and is due 12 months after the period end – note that this is different to the accounts deadline for Companies House above, which is nine months after the year end.   Your accountant will usually just quote the earlier date as the deadline so that the accounts and CT return can be filed at the same time.

There is an automatic penalty of £100 for late filing, regardless of whether tax is due, and then an additional daily penalty of £10 may be charged if it is more than 3 months late.  On top of these standard amounts, a tax geared penalty may be charged if the return is more than 6 months late, based upon the higher of £300 or 5% of the tax due.

Things step up a gear if the return is 12 months late, and penalties are then based upon your behaviour.  The penalty will be the higher of £300 and:

  • 5% of the tax due if the withholding of information was not deliberate
  • 70% of the tax due if the withholding was deliberate but not concealed
  • 100% of the tax due if the withholding were deliberate and concealed (you tried to hide it)

The penalties that apply for late filing of a CT return also apply across other taxes, so these are the same for your personal tax return.


HMRC – CT liability

CT is due 9 months and 1 day after the end of the accounting period.  If you fail to pay the tax due on time then interest will be charged from the due date, along with a penalty of 5% of the unpaid tax.  An additional 5% penalty will be charged if the tax is unpaid 3 and 9 months after the filing date.

If you fail to file a CT return HMRC may make a determination, which is simply an estimate of what they think you owe.  This can be superseded by the real return, but until then HMRC will continue to chase the debt as if it was the genuine one.

Final thoughts…..

A company must keep all the records that support a return – receipts, invoices, statements etc – for 6 years following the end of the period in question.  You can keep these as PDF copies though, so there’s no need to keep boxes and boxes of paperwork.  The only things you need to keep originals of are dividend vouchers and anything else containing a tax credit.

In addition to penalties being incurred for non-filing of documents or for late payment of tax, having a bad record will also highlight you to HMRC as potentially high risk – if you cannot file on time, what’s the likelihood that you’re following the letter of the law in other areas?  So, if you’re continually filing late don’t be surprised if you also end up with an HMRC Inspector coming to visit!


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

New contractor guide to Corporation Tax

New contractor guide to Corporation Tax

Corporation Tax is a levy on taxable profits which is applicable to active Limited Companies incorporated in the UK. If you’re a contractor who has recently set up as a Limited Company it’s helpful to be aware of how this tax works and how it applies to your own company. As a director of your company – under the companies Act 2006 – you are ultimately responsible for ensuring that your company is fully compliant with HMRC regulations. This means that your company must pay the correct amount of Corporation Tax and file an accurate Company Tax Return. Failure to do so can, at the least, result in undesirable fines and penalties.

In many cases a contractor accountant is appointed to help with this which makes this area much easier. A contractor accountant will be able to assist with preparing and filing your Company Tax Return as well as offering expert advice on how to make legitimate tax savings through your company.

Registering for Corporation Tax

HMRC will send you a newly formed Limited Company form – Corporation Tax: Information for New Companies – within a few days of your company being registered at Companies House. Even if you don’t receive this, you must register for Corporation Tax with HMRC within three months of beginning to contract through your company; otherwise a substantial penalty could apply. Registering can be done by post using the form HMRC sends you or online at HMRC’s website. This can be done by you personally or by your contractor accountants on your behalf.

How Corporation Tax is calculated

Your Corporation Tax bill is calculated as a set percentage of the net profit of your business. The net profit is calculated as gross profit less allowable expenses.

Gross profit in a business includes:

  • Ordinary trading profit – profit from your usual contracting activities.
  • Profit made from any investments.
  • ‘Chargeable gains’ – profits from the sale of assets like property or shares.

Deductable expenses can include items such as:

  • Communications, stationery and other general office costs.
  • Allowable business travel including car and public transport expenses.
  • Accountancy, legal and other professional fees.
  • Wages, salaries and other staff costs (including any salary you pay yourself).

The Corporation Tax percentage chargeable varies according to the size of the net profit of the business. Currently, the main rate of Corporation Tax applicable to the majority of the bigger mainstream businesses is 23% (which will be falling to 21% in 2014). However, most contractors will qualify for the small profits rate of 20%, which applies to qualifying companies with profits of up to £300,000.

How to file and pay for Corporation Tax

Corporation Tax, unlike other forms of tax, can only be paid electronically and the payment must be made before the Company Tax Return is filed. Also, HMRC specifies that the supporting tax calculations and accounts which form part of the Company Tax Return must also be filed. This means its vital that all your contractor accounting and records are in good order to ensure all relevant information is readily available for you or your contractor accountants to work with.

The payment deadline date for your Corporation Tax depends on the size of your taxable profit. For contractors who have profits of up to £300,000 (or if higher, less than £1.5million) payment must be made by the ‘normal due date’. This is 9 months and one day after the end of the company’s Corporation Tax accounting period.

The filing deadline date for your Company Tax Return and supporting information is within 12 months of the end of your company’s Corporation Tax accounting period. This date is known as your ‘statutory filing date’.

Getting expert help

There’s no doubt that Limited Company accountancy can become complex and getting tax calculations right is an important part of running your business successfully. This is why the majority of contractors appoint a specialist contractor accountant to take expert care of this. Contact us at Intouch Accounting to find out more about our Monthly Service package and how it can help ease the pressure of running your contractor Limited Company.


This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.