How to keep track of tax as a contractor

Keeping track of your taxes is vital for all taxpayers but especially contractors. In this article, we will cover the following topics:

• Keeping your finances in order
• General good bookkeeping
• Tax obligations
• Types of tax
• Value Added Tax
• How to pay tax

HM Revenue and Customs (HMRC) performs tax compliance checks. These checks are carried out to ensure the Small to Medium Enterprises (SMEs) and contractors keep good quality records that can be used to calculate their taxes. While these checks are relatively easy to comply with, there are hefty fines for not complying with them. 

After the compliance checks, the HMRC will contact you with your results:

• You will get repaid if you paid too much, and you might get paid interest
• Or you will be asked to pay additional tax within 30 days if you owe more

So what do they check? They focus on your primary accounting records, where your tax returns, payroll and VAT are located. If these aren’t in order, then they will start delving deeper into your financial records. So let’s take a look at some of the things you will need to have organised.

A lot of these might come across as basic bookkeeping, but these are where a lot of SMEs and contractors go wrong:

• Invoices: You should record all of your invoices. Number them in the order they’ve been sent out. Make sure to keep copies of them, either as a PDF or in paper form. It’s much easier to store them digitally, especially with specialised accounting software like Countingup. The Countingup app allows you to create, number, send and store invoices on the go and alerts you once you’ve been paid.

• Purchases: You should also keep track of invoices that were sent to you for your purchases. You will need to do this for larger, more expensive items (computers, stationary) and smaller purchases like software fees. You can quickly scan receipts and store them digitally too, using the Countingup app. 

• Expenses: These day-to-day expenses may include travel or lunch. Keep expenses receipts and scan them. If you’re claiming mileage, you can keep a mileage log or use a card or an accounting app. Learn more about what you can claim here.

• Petty cash: Not many contractors choose to use the petty cash book but routinely update it if you do.  

As a contractor, you will need to ensure your tax liability is correctly calculated and that the tax owed is paid on time. 

Your tax return is then sent to you shortly after the end of the tax year. Therefore, you must include your income from all of your sources, not just the revenue from your company. 

The deadline for filing your tax return is the 31st of January every year. If you submit it late, then it will be an automatic £100 fine. 

One of the advantages of being an employee is having all of your taxes handled by your employer. However, contractors have to manage several different types of taxes:

• Corporation tax:  Scheduled to be paid once every nine months (only limited companies have to pay this)
• Employees National Insurance Contributions: If you have employees, this will be paid monthly through their PAYE.
• Value Added Tax (VAT): This is collected on behalf of the government and is paid quarterly or annually.
• Company and Personal tax return: These must be submitted annually and often require an accountant.

Contractors that work through their own contracting limited company may also be subject to VAT: 

• What is VAT? VAT is a sales tax added to the price of most products and services in the UK. Not all goods or services are taxed with VAT — for example, books or financial advice. At the time of writing, the standard rate is 20%, the reduced rate is 5%, and the zero rate is 0%. 
• What is a VAT threshold? A VAT threshold means that when a company earns over £85,000, they must register for VAT. Or else they are at risk of being fined. 
• Contractor invoices (output tax): When you’re registered for VAT, you must add VAT to your preparation and issue invoices. 
• Contractor purchases (input tax): When a contractor purchases someone else’s goods or services that are subject to VAT, they must pay the appropriate tax rate. This is called the input tax. 

At the end of every quarter (or annually), the contractor must add all of the output tax they charged, minus any input, and pay the balance to HMRC. Therefore, you should automatically be sent a VAT return form to your office to fill out and send to HMRC. Learn more about VAT here.

To pay your taxes, the first step is to register for Self Assessment. You can either do this yourself or hire an accountant to do it for you. Once you’re registered, you will receive a Unique Taxpayer Reference (UTR). 

You will need to keep this information in a safe place. You should receive a notification to remind you to complete a tax return each year, usually around April or May. If you don’t receive a letter in the rare case, you must still remember to fill out a return each year. 

Most taxpayers use HMRC’s online services to submit their tax returns each year. To use these services, you will need an activation code. This could take at least seven working days to arrive, so bear that in mind when starting to file your tax return online.  

Learn about the mistakes to avoid when doing your tax returns here.

When you sign up for a Countingup business current account, you get free built-in accounting software that allows you and your accountant to keep track of your accounts with ease. 

We’ve automated the time-consuming aspects of bookkeeping and tax planning, so you can focus on running your business. You also receive insights into profit and loss, cash flow, tax estimates and the ability to create invoices in seconds. 

Keep your finances running like clockwork. Find out more about Countingup here.