As a Contractor, like any other employee, you are liable to pay tax which is claimed in a variety of ways dependent on the status of your business and the way money is taken from company profits.
The main forms of tax are:
If Self Employed (as a Sole Trader or Partnership) tax payable is based on the profit that the business makes and is self assessed and then paid to the Inland Revenue. If the business employs any staff (including Directors) Income tax is deducted from wages and paid to the Inland Revenue in the form of Pay As You Earn or PAYE either monthly or quarterly.
Value Added Tax
VAT is a tax on services, sales and imports. If your company turnover exceeds £58,000 per year your business will need to be VAT registered and charge VAT on the services you provide. The business will also then be able to claim back VAT on the goods that it buys. If turnover is less than the £58,000 limit it is also possible to register for VAT voluntarily.
If your business is registered as a limited company then it is liable to pay corporation tax on profits. The rate of corporation tax is dependent on the level of profits. If sufficient profits have been made companies can also pay dividends to shareholders. These are still taxed as income, but are free from National Insurance contributions.
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