What are the different types of taxes payable by contractors?

Types of taxes

Types of taxes

While being a contractor gives you the freedom to work where and how often as you like, it’s important to remember there are many other things you have to concentrate on than just the particular project(s) you are currently working on. Indeed, one of the things that needs to be taken into account is making sure you pay the right amount of tax.

Unlike your counterparts who work for a company on a full-time permanent basis, the responsibility for sorting out such matters lies squarely on your shoulders. If you do choose to set up as a limited company contractor, you will have to pay – among other things – national insurance and VAT yourself.

Upon making the decision that you wish to work for yourself, one of your first steps ought to be to inform HM Revenue and Customs (HMRC). This means you will be set up with the relevant tax records as soon as possible and should mean you avoid being hit with any penalties. Here’s a look at some of the taxes that will be payable.


VAT – or value added tax, to give it its full name – is probably one of the taxes that most Britons are familiar with. Provided that you have an annual turnover above the specified threshold (which currently stands at £77,000) you’ll normally have to register for VAT, though HMRC notes it may be beneficial to register for it even if your turnover is below this amount. While it was once the case that you could submit VAT returns via the post, you must now send this paperwork – along with any payments due – electronically.

National insurance

Another area of tax that needs to be taken into consideration is national insurance. This can be paid on either a monthly or six-monthly basis, with most contractors and self-employed professionals subject to Class 2 contributions, which are set at a flat rate of £2.65 per week.

However, you might also be liable to pay Class 4 contributions depending on how much your profits are. If this is the case, you’ll have to pay nine per cent on annual profits between £7,605 and £42,475, with an additional two per cent charged on any profits over this amount. On the other hand, if your yearly earnings are below £5,595, you might not have to pay national insurance at all.

As you can see, there are several things to take into consideration when keeping on top of your financial obligations. Consequently, it is a good idea to enlist the assistance of a professional tax return service to help you pay various costs and make sure all your commitments are met in good time.

Doing so will help to reduce the time it can take to fill out tax returns and other forms and, even if you’re relatively confident with paperwork, it’s worth remembering that you might not get to devote as much time to administrative tasks as you’d like when you’re busy working on contracts.

Use the expertise of such a company and you can free up more time to concentrate on bringing in income, while any hard-to-understand concepts and regulations can be explained in plain English by an expert.

In the event you are entitled a refund (something that can happen if it turns out that you have inadvertently paid too much tax), an accountancy and payroll services provider can also arrange for HMRC to pay this sum straight into your bank account. If you’re ever uncertain of what types of tax you are liable to pay, it’s worth getting in contact with such an organisation at the earliest possible opportunity.

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What are the different types of taxes payable by contractors?