One of the things that draws many contractors to the limited company structure as opposed to working through an umbrella company is the potential tax benefits that can be enjoyed.
Provided your contracts fall outside of IR35 legislation, you can withdraw a portion of your reward in the form of a dividend, meaning neither you nor your company have to pay National Insurance Contributions on that part of your income. Because dividends carry with them a tax credit it means you don’t pay any further personal tax on them until your total income exceeds £42,476 for the current tax year 2012/13.
However, the price you pay for these potential advantages is that you have a significant amount of paperwork to concern yourself with, some of which can be particularly difficult to understand.
One area that is of critical importance is completing your personal tax return correctly.
A decision that all limited company contractors need to make is whether to complete tax returns and other administrative requirements themselves or engage the services of an accountancy services provider to do it for them and you will have to make this decision as well.
Some are reluctant to outsource their paperwork for the extra expense it represents. On top of this, the quality of tax assessment software and similar technological aids is improving all the time, meaning there are tools available to those who want to do it themselves.
However, the availability of technology is only part of the story. What you need to ask yourself is whether it is worth spending a little extra to ensure your tax affairs are in order.
It is up to you to tell HM Revenue & Customs whether or not you need to pay tax on money that is not being taxed at source - it is not HMRC's job to decipher this and let you know.
If you do not have a strong head for figures, hiring an expert to complete your tax return for you is something you may want to give serious consideration to.
UK tax laws can be particularly complicated and unless you submit your return by September 30th you will need to calculate the amount of tax payable yourself, which many people find difficult.
Also, if you make any mistakes and underpay or overpay tax, you could incur fines and have to spend more time on getting it right than you had originally anticipated.
The other issue you need to concern yourself with is deadlines. You need to file your tax return by January 31st following the end of the tax year if you wish to do it online. If you fail to meet this deadline, you will automatically incur a £100 fine.
If your return is more than three months late then a daily penalty of £10 will apply up to a maximum of 90 days. Should your tax returns be between six and 12 months late, you will have further penalties to pay.
The complicated nature of self-assessment tax returns, coupled with the amount of time it can take to fill in the form correctly, is enough to convince many contractors that employing an accountancy services provider is the most efficient way to handle the situation.
It is tempting to consider the savings that can be made by not hiring an accountant to handle your tax affairs, however, it may cost you more in the long run, as you may have to devote a significant amount of time to filling in the form - time which you could be spending on working or sourcing new clients.
Tax is an area where you can afford no mistakes. By entrusting your tax affairs to an expert, you can get peace of mind that a qualified professional is handling the situation for you and at a rate that may work out cheaper than if you were to take time out of your own day to do it.