Tax liabilities for contractors

Once you enter the world of contracting there is an increased level of responsibility regarding your taxes and finances.

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There are various ways to handle your taxes – you can choose to do them yourself, you can employ an accountant or you can work through a contractor umbrella company. Whichever method you choose it is very important that your taxes are paid according to HMRC legislation.

Pay them on time

Declaring your taxes can be a complicated process, especially if you are used to full-time employment where your employer has always taken care of it. Ensuring that your taxes are declared correctly is essential as you now effectively work for yourself, any discrepancies discovered by the HMRC could prove to be a problem.

Late tax returns or payments could lead to severe financial penalties. This will be decided by the HMRC and will be determined by factors such as whether the delay was careless, deliberate or deliberate and concealed. If found to be deliberate and concealed, further actions may be pursued by the HMRC.

Follow the code

To pay your tax properly, you will also need to know your tax code. This allows you to calculate how much taxable allowance you can take each tax year (April to April). Your taxable allowance is how much you can earn in a year that you do not have to pay income tax on.


A major factor to consider when declaring your taxes is the IR35 legislation. The IR35 measure was introduced to close a loophole some freelance professionals were using to avoid paying large amounts of tax and National Insurance Contributions (NIC).

By choosing to work through an umbrella company, contractors can avoid the added stress of IR35 legislation. A contractor who works through an umbrella maintains ‘employed’ status and therefore IR35 does not apply to them.

Those who work for themselves must study each client contract to see whether they fall inside or outside IR35 legislation. If you believe you fall inside you must declare this to the HMRC – while it may affect your NET earnings it could avoid certain problems further down the line.

Escape the hassle

Umbrella companies will ensure that all your taxes are calculated properly and on time. You will also benefit from expenses that the umbrella company will allow you, these will also be registered probably with regards to your taxes. Most companies offer a consultant who can help explain the tax system to you if you are unsure.

As a contractor, an umbrella company will allow you certain freedoms. It will take care of all your paperwork and admin tasks, allowing you to focus on what’s really important – your work!

Your umbrella company will invoice the client for your pay, they will then pay you after all the relevant deductions have been made.

This can also relieve some stress for contractors who are in between clients by allowing them the ability to focus on searching for a new contract as opposed to dealing with admin issues.

If you wish to see how much of your salary you will take home after tax, you could use an umbrella company calculator.

Value Added Tax

When you negotiate a contract the rate will exclude VAT, this will be charged on top of your total fee (if you are VAT registered). VAT is paid to the HMRC as a part of your quarterly tax return. If you choose to work under an umbrella company, they will take care of your VAT in the same way.