Contracting is like running your own business, with your skills as the product. It’s a great opportunity to maximise your income, minimise your tax liabilities and make it easy for your clients to deal with you. To achieve this, most contractors consider setting up a limited company or working through an umbrella company.
The benefits of a limited company
As director and shareholder of a limited company you can arrange your income to be very tax efficient. Some accountants claim that by running a limited company you can take home as much as 80 percent of your earnings by using dividends, business expenses and the flat rate VAT scheme.
Setting up and running a contractor limited company is not difficult, and ContractingWISE can help you through the process:
- Register your company name, address and directors at Companies House.
- Register for Corporation Tax, VAT and at HM Revenue and Customs.
- Register for self-assessment if you don’t already fill out your own tax return.
- Open a business bank account in your business’s name.
- Consider hiring a professional accountant. You’ll need to file accounts with the HMRC and Companies House every year, not to mention doing your tax return.
Having your own company means you can claim a greater range of business expenses than as an individual – things like accountancy fees, software and equipment. Employees are limited to expenses for the performance of duties, while for a company it merely needs to be “the purpose of the trade”.
Choosing a contractor umbrella company
Simply setting up a limited company doesn’t always mean you’ll pay less tax, particularly if HMRC decides that you fall under IR35 rules and are effectively an employee of your client. For some contractors, it can make more sense to use a contractor umbrella company.
Contractor umbrellas take all the hard work out of being self-employed – for a fee. Using an umbrella company means you effectively become their PAYE umbrella employee and go on the umbrella payroll.
They take care of invoicing, fee collection, and deducting tax and National Insurance, and you are probably less likely to face an HMRC investigation. On the other hand, you’ll be paying more tax – around 35 to 40 percent according to some accountants – but it’s still likely to be less than if you were a straightforward employee.
If you do choose an umbrella company, make sure you know exactly what the charges are, and check their accountancy credentials thoroughly. Or turn to ContractingWISE – all our partners are carefully chosen and are experts in their field.