All the information a contractor could need on one handy report.
The Live Tax Return is a revolutionary report produced exclusively by LCCS.
LCCS was formed by contractor accountants with many years of contracting experience. So at LCCS we have a unique understanding of the needs of contractors. This is why over a number of years of our own contracting careers the Live Tax Return was born and refined; eventually evolving into the report it is today.
As a contractor working through a limited company you get paid the gross amount that you invoice, which is great. This is the major difference between contracting and working as an employee, where you get paid net of tax. So as an employee you know everything that you get paid is yours to spend. However as a contractor you know you will have tax to pay out of the income you receive.
So as a contractor the main thing you need to know is, how much of the money you receive is actually yours to spend. This is a surprisingly complicated question. And this is where the Live Tax Return comes in. The Live Tax Return will, in one simple report, tell you everything you need to know about your tax situation as a contractor working through a limited company.
It will tell you how much you have earned, how much money you need to leave in your limited company to meet your future company tax liabilities, and most importantly it will tell you how much you can pay yourself, how much you need to save for your personal tax liabilities and how much you are free to spend.
Out of the amount you invoice your client you need to pay company expenses, including wages and potentially NI and PAYE, and also company tax.
What’s left after these expenses is available for you to pay to yourself (and any other shareholders you might have) as dividends.
Up to this point it is relatively simple as company’s tax is linear. So many limited company providers will tell you how much to pay yourself as wages, how much company’s tax you will have to pay, and therefore how much you can take as dividends each pay period.
However this is only half of the story. Once you have received your wages and dividends from you limited company you still need to pay personal tax on this income before you can spend it. Because personal tax is non linear, and contractor wages vary throughout the period this is where it gets tricky. This is where LCCS comes into its own, and other limited company providers leave you in the lurch.
For example say your company invoiced £1,385 for a week and had no expenses other than wages and tax. If that was all you were going to earn for the year you would pay it all out as wages, the company would break even and therefore pay no tax, and your personal wage income would be £1,385 for the year, which is less than the personal allowance of £7,425 and so you would pay no personal tax either. However you can’t live for a year on £1,385, so it is assumed that you will work for more than one week.
Therefore if you invoiced £1,385 we would assume that your total year’s income will be well above £7,000 and that you will have to pay some tax. As a result we would advise that you pay yourself a wage of £135 per week as this is the most tax efficient level of wages.
This leaves the company with £1,250 of taxable profits, and therefore £250 of company’s tax and a distributable profit for the week of £1,000.This is the straightforward bit, you know that the company needs to keep aside £250 for future tax obligations and can pay the rest to you as wages and dividends.
This is where it gets tricky and other limited company providers abandon you. Because personal tax is tiered you need to have some idea of what your total personal income will be in order to know how much tax you will need to pay. For example if you earn £35,000 for the year the highest tax rate you will pay is 20%. However if you earn £185,000 per year you will have to pay at 50% on the final £35,000 if it’s wages, or 42.5% if it’s a dividend.
So if you are only going to earn £35,000 for the year you only need to put away 20% of your earnings. However if you are going to end up earning £185,000 you don’t want to only save 20% of the first £35,000 or you will find that once you have passed £150,000 you need to start putting away at least 42.5% of everything you receive just to meet your tax obligations.
Your total tax obligation on £185,000 is around 35%, so it is far better to save 35% of your earnings from the beginning.
This is where the Live Tax Return comes in. We don’t expect you to necessarily earn £185,000, and we also don’t expect you to know at the start of the year what your total income will be at the end of the year. We have developed self-correcting algorithms that will tell you each week, based on your income and expenses, how much money you should keep in the company to pay your future company tax obligations. It will then tell you how much you can pay yourself in wages and dividends. Finally and most importantly it will tell you how much money you should keep aside each week to pay your personal tax.
For most contractors some weeks will be better than others, so as the tax year progresses you will steadily get a better idea of what your final income is likely to be. The Live Tax Return accounts for this. This is why it has three columns. There is one column for you current week’s earnings which lets you know how much tax you need to put away for the current weeks earnings. There is then a year to date column, which tell you what your profit is for the year so far, and most importantly tells you how much money you should have put aside so far for personal and company tax. This is extremely useful and valuable as it means that throughout the year you will always know if you have enough money set aside to meet your future tax bills. And not only your company tax bills but also your personal tax liabilities.
Finally there is a full year projected total column to give you an idea of how much your total earnings and tax liabilities are likely to be for the year.