Candidates | Contracting Advice
Limited or Umbrella?
Historically, the majority of IT contractors worked through their own Limited Companies. The tax advantages of working this way far outweighed any other method. With the introduction of IR35 these tax advantages may have been removed depending on whether you fall within the new IR35 rules or not.
The options available to you are:
- Operating your own Limited Company
- Operating via an Umbrella Company
Your own Limited Company
Company Set-Up can cost under £100 and many Company suppliers advertise in the trade press. Alternatively, you can apply for a limited company direct from Companies House (but this will take longer).
Umbrella Company
An Umbrella Company provides a ready made invoicing vehicle for personnel whilst also removing the administrative duties normally associated with contracting in the form of a Personal Service Company. The Umbrella Company normally employees the personnel on their staff and is the entity that contracts with the agency, invoices, collects payments, calculates tax and N.I contributions and pays the personnel their net pay direct to their personal bank account.
Timesheets and Invoices
You will be required to fill in timesheets detailing the work you have done for the Client, and the number of hours or days you have worked in a given time period. Your manager or team leader will typically authorise your timesheet.
It is important to keep your timesheets and invoices up to date, ensuring they are sent in at regular intervals. If you run your own limited company then you are your own 'finance director', and in charge of your Company affairs. The responsibility for these matters resides with you. This may seem to be a 'downside' of contracting, but things tend just to slot into place and these tasks will become second nature after a while. Umbrella Companies generally perform these administrative tasks on your behalf.
Professional Indemnity Insurance
IT contractors provide professional advice which is relied upon by others (clients). This means if you make a mistake in your work you have a direct financial responsibility to your client for the errors. Whilst you may consider the possibility remote, it does happen.
Income Tax, National Insurance and Pensions
Personal Income Tax
You will be liable to income tax on all money you pay yourself from your company. Assuming you will reach the higher rate tax band with your combined income from the company, you will have to fill out a self assessment form for income received in each tax year. The tax is payable by 31st January of the following year.
For contractors caught by the IR35 rules, your income will be in the form of a 'deemed salary' after deductions for expenses and National Insurance.
National Insurance (N.I)
National Insurance is paid in proportion to your salary level (to fund state services and the state pension). Not only do you have to pay Employees NI, but if you are also your 'employer' (via a Limited or Umbrella Company), you are also liable to Employers NI. National Insurance is usually deducted at source - from your payroll (if you have an accountant), so chances are, you will rarely have to deal with administration related to NI.
Pensions
Since there are a wide variety of pension schemes available, it is essential that you get truly independent advice - it could save you thousands. Consult an Independent Financial Adviser before you sign anything.
Corporation Tax, Company Cars, Expenses and VAT
Corporation Tax
Corporation Tax is payable on your limited company's profits. This is calculated after your year end by your accountant.
Company Cars
Once seen as a great tax benefit, the government has gradually eroded the tax benefit of owning a company car. Whether you will benefit from such a purchase will depend on a variety of factors, such as the value of the vehicle, engine capacity and especially the mileage you would build up on contractor business. The majority of contractors will almost always be better off without a Company car, but to buy it personally and charge a mileage allowance. Check with your accountant first!
Expenses
A wide variety of expenses can be legitimately claimed against your limited company, saving tax in the process. For those contractors caught by IR35, there will now be a 5% general allowance for expenses instead of an unlimited allowance, although you can still claim 'Schedule E' expenses, such as subsistence and pension payments. For contractors using umbrella companies 'Schedule E' expenses can be claimed and some companies offer 'expenses dispensations' which can provide additional tax savings.
VAT
Limited companies expecting to turnover more than the VAT turnover threshold should register for VAT - this simply means that you collect VAT on behalf of HMRC on sales invoices paid by the Client.
Choosing an Accountant
Given the large amount of administration required in running your company, you will need to find a good accountant to manage this work on your behalf.
Typical services performed by an accountant would include some or all of the following - make sure you check what is included in your monthly fee before signing up:
- Payroll administration
- Processing of PAYE / NI payments to the Inland Revenue
- Preparation of Company Year End Accounts
- Personal Taxation - completing your self assessment forms
- Completion of VAT returns
- Completion of P11D, P35, P60 and other forms on your behalf
- Tax Planning Advice (e.g. Dividend Planning)
Typically, you will expect to pay £60 - £100 per month for a reputable firm. Make sure you find out what this fee includes - beware of hidden 'extras' (such as a £15 monthly charge simply for having a company car).
Many contractors have tried several accountants over the years, before settling for one they feel comfortable with. At some stage, you may feel the need to move accountants for whatever reason - the best time to do this is after a company year end, at the end of an assignment or assignment extension. So, ask other contractors for advice, or ask your Abrecco consultant for the names of a selection of providers; remember that ultimately the choice is yours.
IT Training - Keep up to Date
One of the dangers of contracting is that your skills may become outdated, especially if you are working on a long contract. While the same could be said for permanent staff, they often have access to free training, and have more of a say in the development of new skills on-site.
It is worth investing in 'weekender' training courses to keep up-to-date with changes in technology, or using the increasing number of free internet and CBT based training courses.
Some employers seem willing to send contractors on training courses alongside their permanent colleagues, so don't be afraid to push for training if you can justify yourself to your employer.
It is worth bearing in mind that in December 1999, the Paymaster General announced that 'training expenses' would have to form part of the '5% allowance' for those caught by IR35. Clearly, this proportion of a contractor's income is not sufficient to cover any meaningful training courses, so if you are caught by the new rules, we'd recommend looking at the vast range of free (or low cost) online technology courses.