Whether you are tired of working through an umbrella company or feel your business is ready to make the move from tiny sole trader to limited company contractor, contracting through your own limited company is one of the most rewarding ways of working.
Of course there are some downsides, so here is an overview of the advantages and disadvantages of a limited company:
- Higher take home – The main reason most contractors take the leap into contracting. Contractors trading through an Umbrella Company are entitled to around 60% – 65% of their take home pay, the reason being that working through an umbrella company means you receive your payment in the form of a salary; this is subject to full PAYE Tax and NI, no different to that of a permanent employee! A Limited Company however is one of the most tax efficient ways of working, meaning you can take home between 75% – 80% of your contract.
- Entitled to the Flat Rate VAT Scheme - Why would being part of a VAT scheme be an advantage? Well the Flat Rate VAT Scheme is an incentive introduced by the government, it helps simplify taxes and means you can charge VAT on invoices but pay back at a lower rate, keeping more of your hard earned money. Any good contractor accountants can tell you more about the Flat Rate VAT Scheme should you have any more questions.
- Claim money back on a wider range of expenses - Anything purchased for the use of your business means you can then claim back on expenses. For example if you were an IT Contractor and needed a piece of software for your business, you could buy this and then claim that cost back on expenses.
- Complete working flexibility - In theory, as a contractor you are your own boss, which means you can choose where and when you would like to work.
- Personal assets are covered - As a sole trader you and your personal assets are at risk should your business fail. As a contractor trading through your own limited company, your business is treated separately from yourself, therefore your personal assets are not at risk and your company is treated separately from yourself should there be problems.
- Some paperwork involved – Now, no-one likes to do paperwork, and working through your own limited company does come with some administration however, any good accountant will be able to support you with the paperwork required.
- Accounts filed – You have to file your accounts at Companies House each year.
- Not good if you are….Expecting to contract for three months or less, or expect to be earning more than £25,000 a year.
Here are some top tips to save you and your business money!
- Register as a limited company – this will all depend on your circumstances, but if you’re not currently working as a limited company, and it is possible for you do to so then you might want to consider it. This is because it is the most tax efficient way to operate your business if your turnover is over £25,000 a year.
- Capital allowances – Examples of these include: Tools, equipment, computers, vehicles, furniture etc… Anything that you may need and use specifically for your business OR items you may have used privately before using them for work purposes.
All UK businesses are entitled to claim for capital allowances and this in turn reduces corporation or income tax payable on profits.
- Draw dividends – Usually you will pay yourself a small salary up to the personal allowance threshold and then withdraw dividends.
- Personal tax allowance – If you have a partner, a useful and simple tip for paying less tax is to take advantage of both you and your partner’s personal tax returns.
- Capital gains tax – this is basically the tax on the profit you make when you sell an asset.
You will have a personal allowance of £10,600 for capital gains tax so it may be worth writing some of your assets into your partner’s name, or into both of your names.
- Expenses – Any money that you have had to pay out for the running of your business can be claimed back on expenses.
- Running costs for your home – If you work from home you are entitled to at least £3 per week.
- Register your mobile phone to your business – By doing this it makes it much easier to claim these types of costs through your business.
- Childcare vouchers – You will be able to invest in up to £243 of childcare vouchers tax free a month by using a salary sacrifice scheme.
10. Pension schemes – In most cases pension contributions can be deducted as expenses, however, it would be best to look into it further, perhaps by asking your accountant, as this type of contribution can be quite complex.
Running a business might be one of the most rewarding things in both your personal life and commercial career but for sure it certainly isn’t the easiest. Running your own business whether it be an online or offline business might be empowering, it might even give you the freedom, ownership and dare I say money that you’ve always dreamed of – Felix Denis the hugely successful, immensely wealthy businessman and poet said ‘you’ll never get rich working for somebody else’ which might be true but it does often come at a sacrifice (usually all your waking hours).
As a business owner you’re going to have to do everything yourself, from bookkeeping, HR, sales, marketing, online website management and credit control not to mention whatever it is you’re making or selling. To help ease the financial burden we’ve come up with our top 5 list of free business resources which could save you a penny or two or maybe a little time searching the net. Even if our online resources aren’t exactly right for what you need (well they are free after all) we’re sure they’ll help in deciding what you might need to purchase in the future, better this way than paying for something only to find it’s not quite right for you and have to buy something different:
Find below our top 5 free online business resources:
Using free resources like how to write a marketing plan and using free online accounting software packages makes sense and can also remove some of the fear of the unknown. Very few people will have ever done absolutely everything from finance to sales and marketing and logistics to manufacturing so it’s nice to know there are resources and guides you can tap into and get a head start. As well as free guides there are also plenty of free online software packages from basic accounting to technical online calculators and with the power of Google they’re all pretty simple to find.
Making the move the starting up on your own can be the biggest step, so it’s best to try and get everything planned before you leap into the wild world of freelancing or sole trading.
We all seem to know the days of a job for life are now over as most final salary pension schemes, job security and gold handshake redundancies are a thing of the past, so is it any wonder so many people are looking toward self-employment to regain that feeling of being the master of your own destiny.
We’ve just listed the top 5 free guides and software packages we could find: Free online accounting software, How to write a marketing plan, Free guide to writing a small business plan, Free invoice template and How to apply for a small business grant. However, with a bit of hunting, scavenging and searching, we’re sure there are far more free guides and online software packages around.
A few notes for Contractors
It’s simple download HMRC form SA150 (2012) guidance notes – this is a mere 32 pages and complete an SA100 form, plus if you answer any questions with a yes on page 2, download and complete (or complete online) supplementary pages which can be found on www.hmrc.gov.uk.
Tax by its very nature is complicated, after all, we all do different jobs, some of us or employed, others are company owners, some have investments, second properties and some even dabble on the stock market (although not so many in recent times). All these activities can produce income which may or may not be liable for taxes.
If you’re a contractor the simple solution is get yourself a good experienced and well priced accountant for contractors. They do most of the technical stuff for you, you just send them everything they ask for, of course this is often easier said than done, finding bank and financial statements, P60’s and the like is often a stressful event, after all most of your time is contracting and NOT building comprehensive alphabetised filing systems – so do get yourself a good accountant, if you have an accountant for your Limited company they’ll probably do your return for you, most accountants for contractors include this in their set fee.
So why do you need to fill out a tax return?
It’s a ways to let HM Revenue and Customs (HMRC) know about what income you’ve received and enables HMRC to work out if have either over or under paid your taxes.
How do I complete my tax return?
There are a few options as a contractor:
- Download the form and post it to HMRC
- Go online and fill the detail in over the web (the earlier the better the 31st January is the deadline and it’s always a busy day for HMRC’s website)
- Get your accountant to do it for you
As a contractor I’m a pretty busy person and it’s likely I might forget about the deadline, are there fines for being late?
You’ll be fined £100 if you miss the 31 January deadline
You’ll then have to pay a 5% surcharge if you still haven’t submitted by 28th February so it’s best to not miss your deadlines, if you have an accountant they’ll remind you.
1. Have you signed AND dated the paper return?
2. Have completed and enclosed any supplementary pages?
Other handy resources include:
Oh what a great question – Do I fall under IR35 legislation?
IR35 is just about the most written, most misunderstood and over hyped piece of contractor legislation ever written.
The legislation itself is quite simple and I can understand why the government implemented it. They wanted to make sure employees didn’t leave one day and start the very next day as a contractor, doing this would mean the employer would get away without paying Employers National Insurance which at today’s rate of 13.8% (2011/2012) would means a huge amount of lost tax income.
So how to know if you fall under IR35 or are outside IR35 – well in reality know if you are inside IR35 or outside IR35 it’s pretty simple to know providing you operate and have the mindset of a person who is employed on their own behalf.
A simple way to think about IR35. . . A good way to think about IR35 I’ve found, is to think of a builder you commission to do work on your house, after all nobody would argue a builder is your employee whilst working on your house or remotely considers IR35 for that matter. For example, the builder works under their own control, they’re also free to work for other people (even though most of the time they just have one client at a time). If the builder works on a set fee for the job and material costs go up they have to soak up these costs and therefore accept financial responsibility, also if they can’t continue the job for some reason it’s their responsibility to send somebody in their place to do the work. They use their own equipment (as a contractor/freelancer you’ll sometimes have to use the clients equipment which is ok), if the builder fails to do what is asked, you have the right to find another builder. And finally, builders don’t get many employee perks, after all, you’re not likely to invite your builder to your family Christmas party.
The good news is most of the above will be covered in whatever contract you have between yourself and your client. So providing you operate as a legitimate limited company and not a disguised employee you shouldn’t have too much to worry about with regards to IR35.
Essentially, if you are inside IR35 or outside IR35 it can often come done to your contract and always down to your working practices, obviously your working practices must reflect your contract.
I find that having the mindset of a business owner, I don’t have to worry too much about IR35.
If you want your IR35 contract reviewed there are several companies who offer this service: Qdos Consulting, SJD Accountancy and Bauer & Cottrell are a few that appear for the search IR35 Contract Reviews.
While anyone will tell you that working through your own Limited Company is the most tax efficient way of working, the paperwork and hassle of the whole thing can put people off. However, when I formed my company I was really surprised at how easy it can be.
Once you have get your head around the idea of a limited company, the process is actually fairly simple. The best way, I found, was to use a well recommended limited company accountant. That way you know you’re getting expert help and doing everything the right way.
The first thing you need is decide on a company name. There are certain words you can’t use, such as ‘bank’ or ‘authority’, but you can check these on companies house. It can seem like a big task choosing a company name, however a lot of people will just use a variation of their initials or name.
As an IT contractor, I formed my limited company with just myself as director. However you can form a limited company with a secretary as well (in some case this is no longer required). I used SJD Accountancy to form my company and got my company formed, VAT and PAYE registration, and a business bank account set up all in one package. This did make starting a lot easier and let me concentrate on getting myself ready for my contract.
Prices and packages will vary between companies, and you can form the company yourself through companies house. It can be a really quick process and my company was formed within a few hours.
Once you’ve formed your company its best to appoint an accountant. There is certain paperwork that needs to be filed, and having not contracted before, I chose to use a limited company accountant. This is always a good option when contracting, as a good accountant will look after everything for you. I was guided through areas such as the best way to take my money, tax planning, and was provided with templates to use when invoicing my recruitment agency. The admin now only takes me about 15 minutes per month.
Although there is more paperwork with my limited company then if I’d gone through an umbrella, the benefits more than outweigh the work involved.