How can I calculate income tax due?

shopndrop

My son has recently started working as a contractor for an IT company and is able to claim Schedule E expenses for his accommodation and mileage. The umbrella company that is dealing with his pay has not used all his expenses against his pay and say the balance will just be carried over to the next tax year. At the moment he has paid something like £200 tax for the current tax year, (he has only worked a short while). At present he receives his savings interest as gross as he has not worked previously. What we need to know is if all his expenses were used, he would possibly not be a taxpayer for 2006-07 but will become one for the next tax year. Is there any way that we can calculate if all his expenses were used if he is definitely a taxpayer?

shopndrop

Is there no-one out there that can help please?

LastMinute_2

Hi,

You may want to post somewhere more specific to IT contractors:

http://forums.contractoruk.com/

You'll probably get an answer within the hour :-)

Otherwise, I'd suggest talking to an accountant ... (although if your son is working through an umbrella, I'm assuming he won't have one).

From my limited expertise, I think you just need to remember that every individual has a tax free allowance (about £5K) - and anything above this will be subject to taxation of some form - depending on the setup, this will be Corporation Tax, PAYE/NI etc. Of course, the expenses will offset any profit that will be taxed - I can't be specific about umbrella work, as I don't use this setup myself.

shopndrop

Thanks for this. Will search the forums tomorrow and see if I can find what I am looking for. Didn't know anything like this existed as only previously had experience of PAYE.

Print_Screen

Working with an umbrella company your tax is very high. I work in IT and have just finished working for an umbrella company and an agency and have been taken on full time where the agency placed me.
Its a rather bureaucratic system

Employer pays Agency > Agency pays umbrella > umbrella pays you

However you will usually pay both employers NI and employees NI so a large portion of your wages go as tax.

One solution is to have your son set himself up as a Ltd company or simply contract himself out as a sole trader although then he would have to pay the relevant taxes for these.

An article about employee/employer NI can be found here