How Do You Pay Tax as a Contractor? What you need to know

As a main contractor, it’s important to understand your tax responsibilities. This includes what tax you have to pay and HMRC deadlines. This will ensure you remain compliant and avoid any fines or penalties from HMRC. 

The first step is to inform HMRC about your sole trader business or limited company. The type of business structure you choose will directly impact the kind of tax you pay and the liability on your personal finances.

Sole Trader

A sole trader is a self-employed person with full ownership of their business. This means there is no separate legal identity between business and owner, so the sole trader takes full liability. 

To become a sole trader, you must first register for Self Assessment tax returns with HMRC. You will then be provided with a Unique Tax Reference (UTR) number. 

Sole traders do not pay corporation tax, but instead pay income tax at the standard rate and make National Insurance contributions. Sole traders must complete an annual Self Assessment tax return. You can read more about Self Assessment tax returns on our blog here. 

Limited Company

A limited company is legally separate from the owner, with a unique company identity registered with Companies House. This means personal finances won’t be affected if the business struggles financially. There is also the option to have more than one owner or company director. 

There are more steps to setting up a limited company compared to a sole trader, including choosing a name, choosing directors and a company secretary, choosing shareholders or guarantors, identifying people with significant control (PSCs) over the company and checking what records must be kept. The limited company then needs to be registered with Companies House. 

Limited companies must pay corporation tax and some directors of limited companies must complete a personal Self Assessment tax return depending on circumstances.

As a contractor, you must also register with HMRC for the Construction Industry Scheme (CIS). You can be a sole trader, own a limited company or be in a partnership to register for the CIS.

HMRC defines contractors as someone who either:

• Pays subcontractors for construction work.
• Has a business that does not do construction work but has spent more than £3 million on construction in the last 12 months since the first payment was made.

If either of these apply to you, then you must register for the CIS. You can read more about CIS in our guide here.

Main contractors pay different types of tax depending on whether they are registered as a sole trader or a limited company. 

Sole Trader

Profits made by sole traders during the year are classed as personal income, so they are subject to Income Tax and National Insurance contributions. 

Income Tax

Income tax is tax paid on personal income and benefits received from the following: 

• Profits made when self-employed
• PAYE employment
• Pension income
• Interest on savings
• Share of partnership profits
• Income from property rentals 
• Dividends received from a limited company

The amount of income tax owed depends how much income is above your Personal Allowance and how much income falls within each tax band. 

The standard Personal Allowance for the current tax year (6 April 2023 to 5 April 2024) is £12,570.

There are two types of National Insurance contributions (NICs), Class 2 NICs and Class 4 NICs, depending on profits earned.

Sole traders must complete an annual Self Assessment tax return to combine all sources of income and calculate the Income Tax and National Insurance due to HMRC.

You must register for VAT when your company annual revenue exceeds the VAT registration threshold. The current VAT threshold is taxable turnover in the last 12 months of over £85,000. You must also register if company turnover is expected to exceed £85,000 in the next 30 days. 

You can also voluntarily register for VAT, however, once you are a VAT-registered company, you must charge VAT at the appropriate rate. 

If you are a VAT registered construction company, within the Construction Industry Scheme and supplying services to another VAT-registered business, then the VAT reverse charge will apply. You can read more about this in our guide to the VAT reverse charge here.

The main contractor must file a monthly report to HMRC showing CIS deductions made from subcontractors and pay to HMRC on the subcontractors behalf.

Limited Company

There are two forms of tax paid by limited companies: through the company and personally. 

Company Taxes

Corporation tax must be paid on profits made and the amount depends on how much taxable profit the company makes. A Corporation Tax Return (CT6000) must be completed and money owed paid nine months and one day after the end of the accounting period for the previous financial year. 

Corporation tax is currently set as follows:

As a main contractor, if you are using subcontractors for construction work or employing yourself, you must register your limited company as an employer. As an employer, you can pay yourself or others a salary. The company must take Income Tax and National Insurance contributions from salary payments and pay it directly to HMRC after running the usual payroll (weekly or monthly). 

If you are an employee of your limited company, then National Insurance contributions are payable on any of your salary income taken. 

It’s important to identify the correct employment status of your subcontractors or you could be faced with costly penalties and fines. Subcontractors could be self-employed, workers or employed. Only employed subcontractors would receive a salary from your limited company via PAYE and be eligible for NICs. Read more about employment status on our guide here. 

Similar to sole traders, limited companies must register for VAT when annual revenue exceeds the VAT registration threshold of £85,000 over 12 months, or if you expect your turnover to exceed £85,000 in the next 30 days. Voluntary registration is also possible for limited companies. 

If you are a VAT-registered construction company, within the Construction Industry Scheme and supplying services to another VAT-registered business, then the VAT reverse charge will apply. You can read more about this in our guide to the VAT reverse charge here.

The main contractor must file a monthly report to HMRC showing CIS deductions made from subcontractors and pay to HMRC on the subcontractors’ behalf. 

Personal Taxes

If your contract places you outside of IR35, then you are responsible for paying tax on income received above your Personal Allowance threshold (the standard Personal Allowance is £12,570 for 2023/24). A Self Assessment tax return must be completed. 

Read more about IR35 on our guide here.

Directors of limited companies are classed as employees and pay National Insurance on annual income from salary and bonuses over the Personal Allowance of £12,570. Contributions are calculated from annual earnings rather than each pay period.

NICs can be calculated in two ways: standard annual earnings period for directors paid irregularly or the alternative method for directors paid regularly.

Directors pay and deductions must be reported in the Full Payment Submission (FPS). Even though contributions are calculated annually, NICs must be paid to HMRC after the usual payroll is run (weekly or monthly). 

A dividend is a payment a company can make to shareholders if it has made a profit. Tax is not paid on any dividend income that falls within your Personal Allowance. There is also a dividend allowance each year, and tax is only paid on dividend income above the dividend allowance. 

The dividend allowance for tax year 2022/23 was £2,000 and tax year 2023/24 is £1,000.

Whether you are self-employed, a sole trader or a limited company, it is your responsibility to keep track of taxes. There are some things that can help, including:

• Keeping up to date with changes to tax legislations 
• Making a note of the key dates and deadlines
• Keeping track of your business income and expenditure
• Keeping a record of receipts and invoices sent and received

Sole Traders

There are important deadlines throughout the tax year. For the 2022/23 tax year, these are:

To submit an online Self Assessment tax return, log into your Government Gateway account with your Unique Taxpayer Reference (UTR) code and follow the instructions.

To pay your Self Assessment tax bill, you have to sign into your tax account on the HMRC website with your UTR code. There are various ways to pay depending on how much time you have including:

Limited Companies

There are different deadlines for the taxes owed by limited companies.