Changes to being a self employed contractor
With effect from the 6th April 2014 we are required to apply section 44 of the Income Tax (Earnings and Pensions) Act 2003 as amend by the Finance (no 2 bill) 2013 2014 to payments made to you for your services. This means that for income tax purposes your earnings must be treated as earnings from employment. To achieve this we are required to operate PAYE. This means you will pay your tax as you go along, rather than as in the past having to put money aside to pay your tax upon completion of your Self Assessment Tax return at end of the year. You will normally still be required to complete a Self Assessment Tax return each year.
All companies utilising the services of self employed contractors will be required to either operate in this way or prove that for Income Tax and National Insurance purposes that it is shown that the manner in which the worker provides the services is not subject to (or the right of) Supervision, Direction or control by any person. HMRC has issued guidance on what it views to be Supervision Direction or Control HERE
The operation of PAYE is a set standard that everyone must apply in accordance with the rules and regulations as set down by HMRC.
Your National Insurance contributions are deducted as a percentage of your earnings this percentage is identical for anyone operating PAYE. Income tax calculations are a little more complicated; this is in principle of how it works.
Everyone has a tax code which determines their tax free pay e.g. the standard tax code for 2014/15 is 10000L, which means you can earn £10,000 in a year before you have to start paying income tax. If you have a second job you will have a BR code which means your tax free allowance has been used by your first job and you do not have an allowance that can be used for the second job.
Every pound you earn over your tax free allowance will be taxed at 20% up to £35,000; every pound you earn between £35,001and £150,000 will be taxed at 40% and finally any earnings above £150,000 will then be taxed at 50%. If you are on a BR (Basic Rate) Tax code will be taxed at 20% up to £35,000; every pound you earn between £35,001and £150,000 will be taxed at 40% and finally any earnings above £150,000 will then be taxed at 50%.
The impact of expenses
HMRC provides guidance on expense, but please see our expenses policy about what can be claimed as an allowable expense. You may be able to claim other additional expenses that we are unable to process when you submit your Self Assessment Tax Return.
Legitimate expenses reduce the amount of your taxable pay as they may be processed as a tax benefit e.g. earnings £300, expenses £20 = taxable pay of £280. You will have incurred the expense in the first place to be able to make the claim and this will be reimbursed.
You know what you have spent whilst working on your assignment and HMRC is clear about what you can claim as an expense. Should you claim for something you didn’t actually pay for, you will have to pay back the tax benefit that you had and you may be fined by HMRC. This can be substantial if you get it wrong.
Class 2 National Contributions
Unfortunately until April 2015, when Class 2 National Insurance Contribution will cease, you should continue to pay your Class 2 National Insurance Contributions as set out in Section s.11 of the Social Security and Benefits Act 1992. Whilst many of you may feel that as your income as a self employed operative is now deemed employment income for the purposes of income tax and national insurance it should not apply. This would however be a tenuous argument at this time due to the specific wording of the act.
It is possible to reclaim National Insurance Contributions if you feel that you have overpaid at the end of each tax year details of how to do this are on the HMRC website ( http://www.hmrc.gov.uk/ni/refunds-complaints/claimback.htm ). Gov.uk also have an online tool to claim a national insurance refund here https://www.gov.uk/claim-national-insurance-refund .
As an outsourced service provider we are here to ensure you are able to complete your assignments with as little hassle as possible and to guide you through the process of being a self employed sub contractor following the changes that have been imposed upon us from the 6th April 2014.
The information provided on this page and throughout this website is provided for general information only and does not constitute advice