If you’ve left your permanent job behind, you need to work out if your income will still be taxed at source, or if you need to join the almost 12 million other taxpayers who submitted a Self Assessment return last year.
As an employee, your income tax liabilities are deducted by your employer and paid to HMRC on your behalf. But what happens if you’re no longer a traditional employee? Put simply, if you earn contract income upon which no tax had been deducted, you will need to declare this via the Self Assessment process and pay any taxes due directly to HMRC.
If you are unsure whether or not you need to register, the answer is always ‘yes’ if you contract via your own limited company, and ‘maybe’ if you are an umbrella company contractor and have received certain types of untaxed income during the tax year.
Limited company contractors
All company directors (unless you are running a non-profit company such as a charity) must fill in an annual tax return.
Your accountant may absorb the cost of completing your tax return into their annual fee or may charge a one-off fee + VAT for the service. From our experience, many accountants will charge around the £100 mark per return, but will often add further charges if you have multiple income streams, e.g. property income, investment income, as well as contract income.
You can, of course, submit your SATR yourself, however paying for a professional submission can provide peace of mind, save time, and minimise the risk of making errors.
Either way, you cannot claim the cost of completing your tax return against your company, as it is a personal rather than a business expense.
Umbrella company contractors
If you are contracting via an umbrella company, you will not have to fill in a tax return, unless you have received untaxed income above certain thresholds. As an umbrella company employee, you are taxed at source via the PAYE system (just as permanent employees are).
However, if you have received any of the following, you will need to register for self-assessment:
- You received £2,500 or more in untaxed income (e.g. from renting out a property).
- You received £10,000 or more from savings or investments before tax.
- If you receive child benefit and your income is over £50,000, and your income is higher than your partner’s, then you will have to pay the ‘High Income Benefit Charge’. Read our full guide to the Child Benefit changes which took effect from 7th January 2013. An estimated half million taxpayers now have to join the self assessment process as a result of this change.
- You received income from overseas that is liable to taxation in the UK.
- You earned £100,000 or more during the tax year in question.
- Any have untaxed income from trusts, settlements or estates to declare.
- You have Capital Gains Tax (CGT) to pay on the disposal of assets, such as shares or a second property which is not your primary residence.
Sole Traders / Partnerships
The ‘self employed’ (sole traders and partnerships) must also pay tax via the Self Assessment system. Although IT contractors only work via limited or umbrella companies for a number of reasons, many freelancers operate as sole traders.
All self-employed people must complete an annual tax return, even if the business makes a loss.
COVID-19 changes – more time to pay
As a result of the pandemic, the Treasury announced a series of measures to help self assessment taxpayers.
In May, the Chancellor allowed taxpayers to defer their second payment on account – which would have been due by 31st July 2020. This payment can now be made at any time before 31st July 2021, with no interest charged, or penalties. There is no need to inform HMRC if you wish to defer this payment.
Unfortunately, as things stand (October 2021), you will still need to pay your self-assessment tax liabilities for the 2019-20 tax year by the usual January 31st 2021 deadline.
However, you may be able to spread the cost of your tax payment via instalments, providing you owe £30,000 or less, and have no other tax liabilities owing to HMRC.
Find out more in this dedicated update.
- To read a comprehensive guide to who needs to complete a tax return, read this HMRC guide.
- If you do decide to submit your own SATR, read our guide to completing your tax return.
- The deadline for submitting your SATR, and paying any taxes due, is 31st January in the year following the tax year in question. For example, for the 2019/20 tax year (ending 5th April 2020), the deadline is 31st January 2021.