Contractor s Guide. Moving from Permanent to Contracting. Step-by-step Guide. S J D Accountancy Chartered Tax Advisers and Accountants

Transcription

1 Contractor s Guide Moving from Permanent to Contracting Step-by-step Guide S J D Accountancy Chartered Tax Advisers and Accountants

2 Contracting through your own Limited Company Who are SJD Accountancy? SJD Accountancy are the most recommended accountancy firm on the Internet and are the chosen firm for over 10,000 Contractors and Freelancers running their own limited company s. SJD Accountancy have been providing accountancy services since They pride themselves on their service levels, which put them far ahead of their competition. SJD are the only accountants who offer published service commitments with the back up of a money back guarantee. Click here to see their guarantee. First and only national firm of accountants to be reviewed by KPMG and found to be fully compliant with all HMRC MSC regulations. SJD Accountancy are the UK s largest specialist providers of fixed fee, limited company accountancy services to contractors and freelancers. The only national accountancy firm who specialise in accountancy services specifically tailored to meet the requirements of contractors and freelancers. Winners of the Accountancy Age Awards for Excellence in 2007 and 2004, finalists in 2006, 2005 and Voted by the visitors to as the Best Contractor Accountant. SJD were awarded the Sunday Times Best Small Company to Work For in the UK achieving the highest position ever for a firm of accountants. The first National accountancy firm in the UK to be accredited as a Quality Accountant (QA) by the Professional Contractors Group (PCG). Finalists in the 2007 AXA Business of the Year as awarded by the National Business Awards sponsored by Orange. All inclusive fixed fee structure ( VAT per month) Page 2

3 How to find the right contract or freelance role It s fair to say that, in the main, contractors earn more than people who are working in permanent employment. But this is really only fair, as they have to give up a number of benefits which come as standard with a permanent role. This Guide explains all of the things you need to know when considering contracting, as well as giving details on all the different ways you can choose to operate. The bottom line is, you want to actually take home an income from your contract, and this Guide will tell you how to do that! You will have heard an awful lot of scary stories about the credit crunch and the state of the economy in the media recently. But despite all that, the good news is that the demand for contractors, freelancers, interim managers and consultants seems to be just as high as it ever was. Both the public and private sectors are still choosing to look towards this highly-skilled yet flexible source of personnel to support them. Working with contractors and interim managers offers a far more agile solution than employing permanent staff members and also provides a significantly lower long-term cost impact. How to find the right contract or freelance role There are thousands of contractor and freelancer roles available, so it is important you take the time to plan in advance and look closely at what is available in the marketplace today. Finding a contract to start with is actually not all that different to changing employers. It s just a case of making sure that your CV is fully up to date and then contacting all of the recruitment agencies which specialise in your particular field. For a good idea of the market from recruitment agencies and corporates, you can search online using job boards. Many of these have a free alerts facility, which automatically sends an or RSS feed when a position that matches your criteria is advertised. You can also set up more than one alert, to meet different criteria that you might be interested in. It s also a good idea register with a job board such as This will enable you to save different versions of your CV and covering letter so that you can tailor each application for specific contracts. If you register your CV, agencies can also contact you directly when a role that matches your skills comes up. When you apply for a contract role, it s quite common that an employer would normally expect you to be ready to start work straight away or within a couple of weeks at the most. As such, it is essential that you plan ahead and have everything in place. So it makes sense to set up your limited company or umbrella company arrangement beforehand. This Guide explains both options, and the pros and cons of each. Page 3

4 How much can I earn as a contractor? How much can I earn as a contractor? This is one of the most common questions that would-be contractors ask us! Which is not really surprising, given that the opportunity to earn more money is one of the main reasons why people decide to move out of employment and into contracting. Working through your own limited company is the most tax efficient way of contracting, meaning you keep more of your hard earned cash. Basically, if you choose to work through your own limited company, your take home pay will be anywhere between 75% and 80% of your contract value, for example: Daily rate take home between 150 and 160 Daily rate take home between 225 and 240 Daily rate take home between 300 and 320 Daily rate take home between 450 and 480 Our free online contractor calculator provides an illustration of the maximum amount you could take from their contract when working through your own limited company. It assumes full tax planning and a number of other procedures are in place, some of which are quite complex, so if you d like to chat this through in detail please do get in touch. Ways to operate - Limited Company or Umbrella? It s important to stress that we do not promote or recommend that a contractor works in any one particular way. Only you can make that decision. There are pros and cons for each method of working and everyone personal circumstances and preferences are different. Our advice is absolutely impartial because we offer both limited company and umbrella services. Umbrella Company - This is where you, as a contractor, essentially become an employee of the umbrella company. Which means that you simply submit timesheets to them, and they in turn invoice the end client (or agency) for the work you have done. You are then paid as a PAYE employee, less an umbrella fee. You are usually also allowed to claim some basic expenses, but you do need to be a little cautious to ensure that you stay within Inland Revenue guidelines. Limited Company - This is where you set up your own company in effect, which means that you do not have to pay a fee to an umbrella company. However, you do have to manage all of the administration that comes with running your own business, which can be quite complex. Page 4

5 Which route will enable me to earn more? As a limited company, your contract can either be with your end client or with an agency. Your company can then claim certain expenses against tax including accountancy fees; company formation fees; business travel and subsistence; computer hardware and software; training and professional subscriptions; stationery and postage for business purposes; business telephone charges and any other business costs. Basically, HM Revenue and Customs say that you can claim back anything that is wholly and exclusively needed to carry out the day-to-day running of your business. Click here to review our comprehensive comparison table which indicates the differences between working through your own limited company or through an umbrella company. Which route will enable me to earn more? As a rough guide, if you re outside IR35 (see page 6 of this Guide for more on that) and plan to be contracting for more than three months, then you will almost certainly take home more money if you work through a limited company, but you will have to do more administration than you would if you opted to work through an Umbrella Company. The question is, how much more money? The actual answer depends on how much you re earning, but as an outline, the main savings with a limited company over an umbrella company are related to National Insurance and the Flat Rate VAT scheme. With a limited company you ll also earn interest on your savings (which you must put aside to pay for your taxes) plus have access to a broader scope of expenses than using an umbrella company. Income tax or corporation tax and personal taxes are roughly the same regardless of the option you choose although there are more opportunities for tax planning through a limited company. This is something that you will need to discuss in greater detail with your accountant. National Insurance - With an umbrella company you will pay both employees and employers NI. To explain that in more detail, employers NI is 12.8% of your salary and employees NI is 11% for the first 770 a week and 1% thereafter, both after tax free personal allowances. So for example, on a typical contract of 350 per day you will pay around 300 a week in NI through an umbrella company whereas with your own limited company you will pay just 30, so the NI savings alone come to about 12,000 a year assuming a 45 week working year. At 200 per day you ll save 9,000 and at 600 per day you ll save 20,000! Page 5

6 Setting up a limited company Flat Rate Vat scheme (also see page 9) The flat rate scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 17.5% but only pay back the Revenue in your first year 12% of the gross amount and 13% in subsequent years. This provides the following additional income (based on a 45 week working year): 200 per day contract - 1,530 extra per year 350 per day contract - 3,670 extra per year 600 per day contract - 4,590 extra per year On top of NI and VAT you ll also earn interest in your savings (savings put aside to pay for your taxes) plus have access to a broader scope of expenses than using an umbrella company. Comparison Let s take two contractors both on the same 600 per day. Contractor A uses an umbrella company whereas Contractor B trades through his own limited company. Assuming that both contracts are outside IR35, the difference would be as follows: Contractor A - real value of contract after NI - 115,000 Contractor B - real value of contract after NI and Flat Rate VAT - 138,000 Which works out as an extra 23,000 on the contract value, or equivalent to billing your clients an extra 38 days per year. If your contract falls inside IR35 you will still be better off trading through your own limited company as you can still claim travelling and accommodation expenses; pay no tax on 5% of your turnover; benefit from the VAT Flat Rate scheme; and receive interest on the funds held within your own company. Setting up a limited company If you choose to operate through your own limited company, what do you need to do first and what is the timeline? 1. Establish your IR35 status WHEN: before you sign your contract. WHY: IR35 was launched by the government in order to stop permanent members of staff from switching to contracting but retaining the same benefits, risks and Page 6

7 Setting up a limited company working practices as an employee, as well as being able to take more money home by working through their own limited companies. It is therefore very important to know whether your contracts falls inside or outside IR35. Providing you take the necessary precautions, such as ensuring that you meet all of the conditions in your contract required to stay outside of IR35 - and your working practices reflect the contract - then you really have very little to worry about. HOW: Once you secure your first contract you will need to establish whether it is IR35 compliant. If your contract is through an agency, we would recommend that you to check with them on your IR35 status, as they are sometimes able to advise you. However, if your agency are unsure on the status or if the contract is not through an agency, the only way to be sure whether it falls inside or outside IR35 is to have it reviewed by a specialist. Click here for more details about our contract review service. Even it is determined that you are inside IR35, in financial terms it may still be worth operating through your own limited company as you will only pay tax on 95% of your contract (rather than 100% if your work through an umbrella company) and you will also still be able to benefit from the Flat Rate VAT scheme. See page 6 of this Guide. 2. Form a limited company WHEN: Ideally five to seven days before you sign the contract, but it can be the same day if necessary. HOW: You will need your limited company name, certificate of incorporation and company registration number before you start work, as the contract will need to be in the name of your company. If you form a company using SJD s online service, you will have all of these within four hours of forming. Click here to use our free limited company name checking service and to form a limited company. Forming a limited company only takes five minutes. Our online company formation service is extremely popular with over 95% of contractors using it prior to becoming a client. The fee is only 125 plus VAT, which is one of the lowest fully inclusive fees in the market, you can buy cheaper but they very rarely include everything you need, or offer any kind of after-sales service. Our formation service offers same-day formations and includes opening a company bank account, VAT/PAYE registration and advice on share structure. Page 7

8 Setting up a limited company The structure of your news company will need to look something like this: Director details Secretary details Subscriber/ shareholder The director controls invoicing, the company bank account and decides on how much to pay themselves, which is made up of a combination of salary and dividends. Following a change in legislation, as of 6 April 2008 there is no requirement for a company secretary. You will need to allocate shares in the company. Dividends are distributed to the shareholder/s of the company, which is how you will take most of your income. You will also need to register your company to a registered office address. Most people simply use their home address, but there is an advantage to be gained by using SJD as your registered office as we can receive all correspondence direct from Revenue & Customs and Companies House on your behalf. There is a small annual fee VAT for this service. 3. Appoint an accountant WHEN: Ideally a few days before, but can be done at any point. WHY: Take home pay, dividends, expenses, profits, salary, benefits, personal allowances, tax planning... You are likely to have 101 questions, and your accountant will be able to answer them all, guiding you on the most tax efficient way to operate your Limited Company. Click here to see just what your accountant can do for you. Administering your own limited company can be simple, efficient and inexpensive when you have the help of a specialist firm like SJD Accountancy, which is dedicated to contractors and freelancers. Most importantly, it ensures that you minimise the amount you pay in tax legally, so that you can retain the maximum amount from your contract. HOW: SJD offers a complete fixed fee package including completion of accounts, payroll bureau, dividends, corporation tax computations, personal taxation, free bookkeeping software and all company returns - plus unlimited access to your accountant of course. It s basically everything you need, for a fixed monthly fee of just VAT, one of the lowest prices around. To appoint SJD Accountancy please click here. Page 8

9 Setting up a limited company 4. Open a Business Bank Account WHEN: At least seven days before you are due to be paid. HOW: SJD Accountancy recommends Cater Allen who are part of Abbey National Business Banking and Bank Santander. They offer free business banking to clients of SJD and you only need a 1 to open an account. Of course you are entirely free to use any bank, but due to Cater Allen s high level of customer service, good interest rates and most importantly their commitment to FREE business banking they are our recommended business banking partner. If you form your company with SJD Accountancy, we will send you an application form for a business bank account which will take around a week to open. 5. Register for VAT WHEN: Once you have formed your company. HOW: There are a two different ways to operate. One is the standard way, where you claim back VAT on items that you buy through your company - and the other is the option that most contractors take, which is to sign up to the Flat Rate VAT scheme. The Flat Rate scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 17.5% but only pay back 12% of the gross amount in your first year and 13% in subsequent years. Most contractors choose this option as, on the whole, you won t be buying that much in the way of company related items and you will make more money by opting for the Flat Rate Scheme. As a guide, it provides the following additional income, based on a 45 week working year: 200 per day contract - 1,530 extra per year 350 per day contract - 3,670 extra per year 600 per day contract - 4,590 extra per year It takes around six weeks to get your VAT number. During this time you ll need to invoice your clients without VAT and when you are issued with your VAT number you can simply raise VAT-only invoices. Page 9

10 Expenses: Some basics Expenses: Some basics HM Revenue and Customs say that you can claim back anything that is wholly and exclusively needed to carry out the day-to-day running of your business. Some of the expenses you can claim though your company are: Accountancy fees, company formation fee, business travelling and accommodation expenses, stationery and postage for business purposes, computer hardware and software, training and subscriptions. If you have any questions about contracting through your own limited company or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on or Page 10