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...]
Contracting through your own limited company can be financially beneficial, though setting yourself up requires a degree of administration and paperwork and there are no short-cuts.
Before you can start contracting through your limited company you need to set one up in the first place! There is a defined list of tasks you need to go through.
These set-up steps can be done for you by a specialist contractor accountant, which is standard industry practise. And don't worry, 'specialist' doesn't carry a hefty premium price - good old market competition means prices are as competitive as ever.
It's pretty straightforward to set-up a limited company directly from Companies House. The cost is just a few pounds and this part of the process involves completing an online form.
The alternative is to use an agent who will do the setting-up and form filling on your behalf. There is an additional cost for this, but money well spent if you don't have the time yourself.
When your limited company has been formed you can go ahead and open a business bank account. You'll benefit by setting up a deposit account at the same time as you open a current account.
Use the deposit account to hold your future tax bills. That way you won't be tempted to spend more than you really have, and reduce the worry tax bills are usually associated with.
Having chosen a contractor accountant to look after your limited company financial affairs you need to authorise them to carry out the work on your behalf. Another form to complete (64-8) and send to HMRC.
While you're at it, consider whether you want them to handle your own personal tax affairs. It makes sense to have everything in one place - if so, complete two of these forms.
Regardless of your limited company turnover, you should register for the Flat Rate VAT scheme. Being VAT registered adds an air of professionalism and you will be able to earn extra income through the difference in VAT rates.
The Flat Rate VAT is only open to those companies whose annual turnover is less than £150,000. If you expect to earn more than this you will just have to register for standard VAT.
HMRC will automatically send out an information pack to all new companies. The CT41G form needs to be completed and returned to HMRC.
This form is not complicated and requires a few basic details of your company.
In order to pay yourself as a director, as well as any other employees you may have, your limited company needs to register with HMRC as an employer. HMRC will then send you a New Employer Pack.
Subject to the advice you receive from your contractor accountant you will probably have quite low PAYE and National Insurance Contributions tax to pay. If so, only quarterly payments are necessary.
That's it. Your limited company is ready to go.
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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.