Guide to Freelancing - PCG

There is one very important point to remember – you and your limited company are two
separate legal entities. You have your own tax responsibilities; personal income tax and
employee‟s National Insurance Contributions (NICs). The company has tax to pay too. A company
pays three main types of tax: VAT (covered in the previous section), corporation tax and
employer‟s NICs.
PERSONAL INCOME TAX PAYABLE BY THE DIRECTORS
PAYE and NICS
Directors and employees of limited companies pay income tax on their taxable income. This will be
deducted monthly through PAYE (Pay As You Earn), which is HMRC‟s system for collecting income
tax from the pay of employees, including directors, as they earn it. An employer is required to
deduct income tax and NICs from its employees‟ pay and to submit the deductions to HMRC. This
usually needs to be done by the 19th of each month, unless your average monthly payments are
likely to be less than £1,500, in which case you may be able to pay them quarterly. Ask your
accountant to set this up for you.
Tax on other income
If you are working through your own company then you will need to complete a Self Assessment
Return, including any dividends your company has paid you, as well as any benefits in kind (such
as medical insurance or company car) that you have received from your company, which should be
shown on your P11D for the year. Each year, HMRC will send you a tax return that is tailored to
your circumstances. You should receive this in April, and if you do not, contact your tax office.
You need to fill in your tax return with details of all sources of taxable income, taxable gains,
reliefs and allowances.
If you want HMRC to work out how much tax you need to pay, you must submit your return by
31 October following the issue in April. The deadline for the submission of the Return is
31 October (if a paper return is being completed) and 31 January (online filing, but
please allow at least 10 days to register with HMRC for online filing) following its issue to
avoid paying a penalty but if you submit the form after 31 October you will also need to calculate
the tax due and pay the amount by 31 January.
EMPLOYEE‟S NATIONAL INSURANCE CONTRIBUTIONS
Your limited company has to deduct class 1 contributions from salary it pays you over a certain
level. It also has to deduct class 1A NICs on benefits in kind, such as medical insurance or
company cars. These are declared annually via a form P11D. NICs for company directors should be
calculated based on an annual, or pro-rata annual, earnings period.
Lower Earnings Limit (LEL): £102 per week
This is the minimum level of earnings that an employee needs to qualify for benefits, such as
Retirement Pension and Jobseekers Allowance. If your salary is between £102 and £139 per week,
you will not pay NICs but will be treated as having paid them when claiming state benefits. For this
reason, you must keep details of an employee‟s earnings at or above the LEL on a form P11 or
equivalent record and report them at the end of the year on a form P14.
Primary Threshold (PT): £139 per week
When earnings exceed the above level, NICs are deducted from the employee‟s salary at 12%.
Copyright PCG September 2011 Guide to Freelancing Version 7.0 50