How to Start Up As a Contractor
Before you go out on your own and start up as a contractor, you need to decide what trading structure you’re going to use. The main options contractors choose are working through an umbrella company, or working through their own limited company. This guide gives you an overview of the options – and how we can help you reach the right decision.
What are the advantages of a limited company?
If you’re going to be invoicing over £35,000 a year, then the limited company is likely to be the best way for you to trade. It’s more tax-efficient than operating as a sole trader, or through an umbrella company or agency, allowing you more net return on your gross earnings.
The limited company offers you more flexibility over how you pay yourself and when you pay tax. You can pay yourself a combination of salary and dividends, set off expenses to reduce the tax liability, and leave money in the company if you don’t need it immediately.
How does it work?
A limited company is a legal entity in its own right, separate from the individuals who own and manage it. It’s the company that contracts with the clients, not you. It owns property, generates income, has legal and financial obligations.
- It’s owned by shareholders, managed by directors and staffed by employees. It’s generally administered by a Company Secretary (although this is not compulsory). It has its own name, bank account and registered office.
- It has to be registered at Companies House, and must submit annual returns. It has to take out insurance policies. And, of course, it has tax obligations to comply with: PAYE, NI contributions, VAT and corporation tax.
- The limited company comes with a complex array of obligations but allows you the flexibility and freedom to take home more money, look more professional and plan your career for the long-term.
And we are here to help take away the anxiety and hassle of setting up and managing your limited company, so you can get on with doing your job and enjoying your time away from work.
How do I fit in?
Generally, you will be a director of the company and the main shareholder. This means you own, manage the company, and have great flexibility over how you pay yourself.
You can arrange for the company to pay you a director’s salary and/or bonus through the payroll, and/or it can issue you a dividend as a shareholder. The salary is deductible from the company’s corporation tax bill. Dividends attract a lower rate of income tax.
The tax-planning potential is complex but fruitful, and we’ll ensure it’s structured in a way that works best for you.
As owner/manager of the company, you have legal responsibilities:
- To maintain company books, and accounts;
- To prepare and submit company tax returns – VAT, corporation tax – and ensure the tax is paid in full and on time;
- To put the correct insurances in place (e.g. employer’s liability);
- To ensure the company complies with IR35;
- To set up a payroll so that income tax and NI contributions are deducted at source and paid to HMRC;
- To pay employer NI contributions.
And as a director, you have to prepare and submit your own personal tax return.
Again, we can help you with all this. We talk to you and advise you. We educate you to be in control of your limited company. And we do the stuff you haven’t got the time or inclination to do.
Find out more about our Simplicity and Simplicity Lite services. They take away the hassle of running your limited company.
What about an umbrella set-up?
The umbrella is for contractors who are looking for an easy option. Trouble is, this set-up takes away much of the flexibility of being your own boss.
The contractor is employed by the umbrella company and is paid a salary. The umbrella deals with the ultimate customer/client, and takes a fee. The contractor can deduct some expenses to increase take-home pay, but that’s the only bit of tax-planning available.
The benefit of an umbrella set-up is simplicity. You do the job, put in your expenses and get paid.
Our fixed-fee Simplicity service does just that too, and for about the same price as you would pay most umbrella companies. But if offers so much more – the flexibility and freedom of working through your own company, expert financial and tax-planning advice, and all your accounting and book-keeping sorted for you.
Isn’t agency working the answer? Simple? Low-risk?
Working through an agency is certainly simple and low-risk. The agency sources work for you, and manages the client. You just turn up and deliver. You get paid by the agency, net of income tax and NI contributions – and the agency’s commission.
What’s missing is any sense of permanence, relationship or independence. As an agency worker you can take very little control over your professional direction. Somebody else is fronting your business, and you are making little investment in your future.
And you have no ability to increase your take-home pay through financial and tax-planning. You can’t even deduct your business expenses.
Maybe I should just work as a sole trader…
As a sole trader, you’re on your own. Which may suit you. No umbrella, no agency or limited company. Many people starting up in business go for this option – because there’s very little do to, initially at least.
All you need do to get started is to register as self-employed with HMRC and set up a direct debit to pay monthly Class 2 NI contributions. But you’re still responsible for keeping accounts and paying income tax, and registering for VAT if your turnover exceeds the relevant threshold.
And, as a sole trader, you do not enjoy the limitations on your personal liability that you get if you work through a limited company, which makes it even more important to put professional indemnity cover in place.
You may also find some agencies are unwilling to offer you work as there are employment law risks with engaging an individual to work on contracts. Whichever vehicle you choose, you should be aware of the risks of falling within IR35. See our IR35 resource guide for more information.
your sole trader income is all taxed at your personal income tax rates, whereas the same income paid to the limited company would be taxed at, lower, corporation tax rates;
the limited company only pays you the amount of salary you actually need – which is all that is taxed at your personal tax rates;
any dividends issued to you as a shareholder of the limited company are taxed at lower rates than your personal income tax rates.