Why tax refunds aren’t always a good thing for contractors

Why tax refunds aren’t always a good thing for contractors

For most people, finding out that they are getting a tax refund is great news because it means they get some extra spending money they weren’t expecting, which they could use to pay off debts, or spend it on anything else they can think of.

Why do people get tax refunds?

You usually get a tax refund when you pay more tax than you actually owed, or when business losses are offset against a former tax liability.

When are tax refunds a good thing?

As a contractor working as a limited company, you have to make Payments on Account, which is when you pay some of your tax to HMRC in advance. Sometimes the tax contractors pay through Payments on Account is higher than their actual tax bill.

Contractors might also get a tax refund if they make a Payment on Account but then go back full-time employment, and so stop any contracting work.
In either case, the contractor will receive the tax refund after the end of the tax year.

When are tax refunds a bad thing for contractors working as a limited company?

Contractors working as a limited company might also receive a tax refund when business losses mean they owed less tax.

This is less than ideal, not only because it means your contracting business suffered losses, but also because the tax refund will be for Corporation Tax. You can claim this tax refund personally, but because it is from Corporation Tax, you will need to pay yourself through dividends, which itself is liable to dividend tax.

What if losses are due to investing in business growth?

While business losses are often a bad sign, when they arise from investing in growing your business, getting a tax refund can mean getting extra money on top of a healthy cash flow due to increased customers.

Make sure your contracting business is always strong with 1Stop accountants

1Stop Accountants specialise in helping contractors with their accounts and other areas of business. Not only will we make bookkeeping easy, we’ll ensure taxes are always filed and paid on time, and help you grow your business.

Get in touch by calling 020 3500 0623 or filling out our contact form.

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Phone: 020 3500 0623