How much income tax should you be setting aside?

When it comes to paying income tax as a contractor it is important that you don’t leave yourself short.  The best advice is to only draw your dividends when you have enough in there to cover your contract accounts.

Finances, especially in this tough economic climate, need to be in order.  You should always make sure that you have paid your VAT and Corporation Tax as well as your National Insurance Contributions.

Once all this has been done there is the small question as to how much income tax you should be paying?  Well, you will find that most contractors, freelancers or consultants will only be paying themselves a small salary.  The rest will make up their dividends.

It is wise to put aside around 25% of your income in order to pay for your tax if you are in the higher rate tax bracket.  This will be at £34,370 for the 2012/13 tax paying year.  Basic rate tax is at 10%.  It is 32.5% for incomes over £35,000 and 42.5% for incomes at additional rate over £150,000.

It is a wise idea, if you are struggling to understand exactly how much tax you should be paying, to employ an accountant.  As a contractor, freelancer or consultant, having an accountant will mean that the hard graft of making sure that all your books are balanced and all of your accounts are in order, is in the hands of a professional.

However, it is vital, that if it is your business, that you understand how much money is going in and out of your company.  In some cases ignorance can be bliss but not when it comes to the tax man!