There are a number of things to consider when you first make the move to becoming a contractor and one of the most important is whether you are to operate as a sole trader, utilise the services of an umbrella company or form a limited company.
The latter option is the one perhaps most closely associated to contracting, as it holds the much-publicised benefit of enabling you to reduce your tax burden. However, this is a path that is only open to those who fall outside of the IR35 regulation.
IR35 is designed to ensure that salaried employees cannot be listed as company directors in an effort to reduce the amount of Income Tax and National Insurance that they pay. It’s application to your particular situation is dependent on HM Revenue and Customs’ (HMRC’s) definition of ‘self-employed’ and as a result it can be difficult to ascertain whether it applies to you or not.
As a general rule, you are likely to be considered inside IR35 and so unable to operate as a limited company director if you are told when, where and how to work by a client. However, if you are in control and the terms of the contract reflect such a right of control, you will be deemed to be outside of IR35 and so will be free to set up a limited company.
The major benefit of doing this is, as mentioned previously, that you can significantly reduce the amount of tax and National Insurance contributions you are required to make. Additional funds can then be withdrawn from the company’s profits in the form of shareholder dividends and director’s loans.
However, one of the things that puts people off choosing to form a limited company is the amount of paperwork that they are required to complete and the ongoing administrative tasks associated with this.
Fortunately, there are a number of accountancy services providers who will be able to assist you with the running of your limited company, while also advising you on the salary you should withdraw from the company and the expenses that you can claim.
This is one area that contractors often overlook, but there are a wide range of products and services that you can claim as allowable expenses that will further reduce your tax burden.
These firms will also assist you when it comes to filing a personal or company tax return. At first glance, this paperwork – or online process – can seem particularly daunting, but a qualified accountant will be able to take care of the vast majority of the difficult work, leaving you free to concentrate on contracting.
Because you will not be required to complete the time-consuming administrative tasks related to operating as a limited companycontractor, you will have much more spare time – which you can use in the way that best suits you or your business.
You might choose to use this time to attempt to expand your business through advertising, or by going the extra mile with certain clients that will help you to build up a strong reputation.
Alternatively, this time could be spent on your hobbies or with your family. After all, you don’t want to be working all the time – perhaps the biggest benefit of contracting is that it allows you to take control of when and where you work.