Self Assessment for Contactors

HM Revenue and Customs (HMRC) uses the Self-Assessment system to collect income tax.

Tax is typically taken out of wages, pensions, and savings automatically. Other income, such as grants and assistance payments from COVID-19, must be reported by individuals and enterprises on their tax returns.

The tax year in the UK runs from April 6 through April 5 of the following year.

The 31st of January following the end of the tax year is the final date for filing your tax return (and sending it to HMRC).

You will be fined £100 if your tax return is not filed by January 31. If you consistently file late or not at all, there may be further fines.

WHEN AND HOW DO CONTRACTORS PAY A SELF-ASSESSMENT TAX BILL?

The deadline to submit self-assessment is the same for contractors which is 31st January. The payment deadline for returns that must be filed for the tax year that began on April 6, 2021, and ended on April 5, 2022 is midnight on January 31, 2023.

HMRC essentially assumes that you'll make a comparable amount of money again and requests an advance payment for your subsequent invoice. The down payment is equal to half of the cost from the previous year.

Depending on the type of business structure they use, contractors file tax returns just like any other type of business. The ideal organisational setup for your contracting business also depends on the specifics of your situation.

HOW DO CIS tax returns affect Self - Assessment?

A portion of a subcontractor's earnings is retained by building trade contractors under the Construction Industry Scheme (CIS), who subsequently pay the reduction to HMRC. It resembles what employers do for their workers.

While the contractor may have to do some more administrative work, subcontractors will be more affected. This is due to the methodology used to determine CIS deductions. The CIS tax rate and the tax-free personal allowance are the two components of this.

CAN CONTRACTORS CLAIM TAX RELIEF ON SELF-ASSESSMENT?

Any business can claim tax reduction on its expenditures by including all permissible expenses on its tax return.

A contractor working in the construction industry could claim tax relief on allowable expenses such as:

·       Accountancy fees.

·       Travel costs relating to work.

·       Material for work.

·       Essential Equipment and tools.

When you submit your Self-Assessment tax return, it is definitely worth declaring all the expenses to which you are entitled.

CONTRACTORS CAUGHT BY IR35

Since your income will be handled through the PAYE system and you will be paying your tax responsibilities monthly in accordance with your personal tax code provided to you by HMRC if you are caught by IR35, your self-assessment liabilities payments are likely to be negligible or non-existent.

CONTRACTORS OUTSIDE OF IR35

Any additional tax that is owed if you are working beyond the parameters of IR35 will depend on whether you are a higher-rate taxpayer.

You are not likely to have a very significant self-assessment tax burden if you do not pay higher-rate taxes. This is due to the fact that your tiny pay will be handled through PAYE, and dividends up to the higher rate tax threshold will not be subject to further taxation.

You will be responsible for paying self-assessment taxes if your dividend income exceeds the higher rate tax level and you are a higher rate taxpayer. Any self-assessment tax liability will only be the balance due; therefore, HMRC will fully credit all PAYE, tax withheld at source (on bank interest, for example), and dividend tax credits; you only need to pay the remaining balance of your liability as of January 31st, along with the payments on account.

WHAT ABOUT CIS TAX RATES?

Whether or not the subcontractor is registered for the scheme, the contractor deducts CIS tax.

·       They will deduct 30% if you are not registered with the CIS. You can recoup any overpayments that may occur as a result of submitting your self-assessment.

·       A contractor will withhold 20% of your compensation for CIS tax if you are CIS registered.

MAKING PAYMENTS ON ACCOUNT

According to HMRC's rationale, your income and IR35 circumstances will be equal to or better in the following tax year.

So that you won't owe any money next year, you pay two instalments of 50% each, based on your tax assessment from the previous year. If you anticipate a decrease in income in the upcoming tax year, you may request a reduction in the account instalments. But be aware that if your income is larger than anticipated in the upcoming tax year, HMRC may assess interest on tax that should have been paid in instalments.

Contact Cheylesmore Chartered Accountants to get further information regarding Self-assessment for contractors.