Setting up as a contractor - Ltd company, umbrella, or PAYE Setting Up
Setting up as a contractor - Ltd company, umbrella
, or PAYE Setting UpChoosing how you operate
Historically, the majority of IT contractors worked through their own Personal Service Company. 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.
As a general rule, if you fall outside the IR35 rules then you will be most likely better off using a Personal Service Company, whereas an Umbrella Company may be more beneficial otherwise.
The options available to you are:
o Your own Personal Service Company
o Umbrella Company
o PAYE through the Agency
1. Your own Personal Service Company
Company set-up can cost from 100 using either an accountant or one of the many Company suppliers who advertise in the trade press. Alternatively, you can apply for a Personal Service Company direct from Companies House, which is a cheaper option although the process does take longer and requires you to take on the administration burden.
Some contractor accountants will set up your company for free on condition that you sign up as a client.
Once you have formed your Personal Service Company, you will need to appoint a company secretary, which fulfils a legal requirement to record company meetings and perform administrative duties. In practice, this role is minimal and should not take up much time during the company year.
Many contractors appoint their partner, or a parent.
You can check to see if your preferred Company Name is available at the Companies House website (http://www.companieshouse.gov.uk/info/ ).
You will then be responsible for issuing invoices to your client/agent, running a payroll, issuing dividends, registering and accounting for VAT, and various other tasks. You normally would appoint an accountant to perform some of the following duties on your behalf - make sure you check what is included in your monthly fee before signing up:
O Payroll administration
O Processing of PAYE / NI payments to the Inland Revenue
O Preparation of Company Year End Accounts
O Personal Taxation - completing your self assessment forms
O Completion of VAT returns
O Completion of P11D, P35, P60 and other forms on your behalf
O 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, since most outstanding paperwork should have been completed by this stage. So, ask other contractors for advice.
2. Umbrella Company
An Umbrella Company provides a ready made invoicing vehicle for contractors whilst also removing the administrative duties normally associated with contracting in the form of a Personal Service Company.
The Umbrella Company normally issues invoices on the contractor's behalf, collects payments from clients/agencies, calculates tax and NI contributions and pays the contractor their net pay direct to their personal bank account.
You are generally allowed to claim valid business expenses (e.g. travel to work expenses) to reduce your tax and NI liabilities although some Umbrella Companies charge extra for this service. Additional benefits, such as discounts on financial products and free advice, are often included in their services.
Traditionally, Umbrella Companies were more expensive than running your own Personal Service Company, mainly because their charges included all the administration overheads, and they tended not to offer the same tax advantages. With the introduction of IR35 the tax disadvantages of Umbrella Companies have been reduced and a new breed of internet based umbrella companies have emerged.
Variations on umbrella company schemes include Managed Companies and Composite Companies.
Managed Companies normally offer similar facilities to a normal ""umbrella"" with additional benefits such as holiday pay and sick pay. This kind of service attracts premium charges, normally based as a percentage of gross invoiced income, to reflect the level of benefits provided.
Composite Companies also offer ""umbrella"" type facilities with the contractor also being a part-shareholder of the ""composite"" company. The contractor is normally paid a base salary with the balance of their income going into a shareholding ""pot"". The contractor's share of this ""pot"" is then normally retrieved at the most tax advantageous time (normally years later).
A plethora of companies offering variations of this theme have sprung up in an attempt to reduce the effect of the IR35 legislation.
3. PAYE through the Agency
Some agencies allow you to become ""PAYE"" through their own payroll service.
This is the least tax beneficial option available to a contractor as you pay full tax and NI contributions on all your earnings.
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