Are you a contractor? If you work for someone else, it is important to know whether you are working for that person in an employed capacity or in a self-employed capacity as an independent contractor.
Your employment status will determine the charge to tax on income from your employment or self-employment. It will also determine the class of NICs, which are to be paid.
Umbrella Companies employ you for tax purposes and complete central returns for all their contractors. It's less hassle and more flexible for you but take home pay is typically less than that the limited company option.
The best option for you depends on your plans, 'one off' contract or 'contractor for life'? [Read More...]
Many poeple woirk from home these days. If you run your own company from home, don't miss out on any expenses opportunity
It's a simple way of reducing your tax bill by claiming what's right under your nose.
If, like most contractors who manage their own limited company, you are an employee of your company all you need to do is have in place a formal rental agreement.
Contractors (employees) can rent their home office to their limited company at commercial rates. The rate would be naturally greater than the minimum rate of £3 per week which HMRC permit.
Renting an office is a perfectly correct business expense any limited company will face. The only documentation required to form a landlord/tenant arrangement is a commercial rental licence.
The licence would be between the contractor as an individual homeowner and the limited company which needs an office. The rent will reduce the limited company's Corporation Tax.
As a homeowner and limited company employee simply create a written rental licence, setting out a commercial understanding, between yourself and your limited company. It will specify how much rent the company will pay you for the use of the office.
Contractors should ask their limited company accountant for a draft rental licence template. This will save on legal fees and ensure the contract TandC's are compliant and correct.
Don't start thinking you can charge City of London rates for a bed-sit in Middlesbrough. The whole principal underpinning this rental arrangement is that it is a commercial arrangement.
The rental rate needs to be realistic. If anything, the rental rate should be lower than the market price for your area.
For maximum benefit, the rate needs to be at a level to cover your expenses while reducing your income tax. And remember, there is no National Insurance payable on rental income.
The other main advantage to this arrangement is the limited company can reduce its Corporation Tax by off-setting this legitimate expense.
Use HMRC's suggested method for sole-traders to work out what you should be charging your limited company. Err on the side of caution if you're in any doubt.
As an example, the homeowner charges an annual rent of £1,100 to the limited company, and you've worked out that the HMRC home office expense is £750. You get a profit of £350. Only the profit is taxed (no NIC charge) not the whole of the rental income.
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It's the basics... Compliance with Tax, VAT, PAYE and fiscal arrangements is mandatory for contractors regardless of whether you use an umbrella company or your own limited company.
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Umbrella Compare provides a holistic overview of contracting with the aim of helping new and old contractors find the right payroll solutions. Contracting should be about focusing on the contract, not payroll, accounting, HMRC and bureaucracy.