Accountants for contractors
Contractors cover a wide range of professions, from consultants to builders, all offering a unique service to clients. As a contractor, your job is to provide everything from materials and equipment, to personnel and goods, to ensure that the contracted job is completed with the client’s specifications in mind.
In today’s diverse and fluctuating business world, being a contractor comes with many advantages. However, as a self-employed contractor there are also many things that you should consider in order to be successful, from managing your finances to potential tax issues including IR35 legislation.
Benefits to being a contractor
Being a self-employed contractor definitely has its perks. Working for yourself gives you the freedom to adapt your workday to suit you and also allows you to see an increase in your yearly income.
Some of the benefits of being a contractor include:
- Increased earnings
- Flexible working hours
- Flexible holidays
- Every day is different!
- In control of your own skills development
- A better work/life balance
As an independent business, with all these great benefits, it’s important to realise that your tax responsibilities differ from those who work in more conventional jobs. Tax Agility can help you ensure that your finances are kept up to date and that you’re aware of the taxes you need to pay, and the ways in which you need to pay them.
Setting up as a contractor
Legally setting up as a contractor is a necessary step to furthering your contracting career. Before doing so, however, you need to think about how you would like to go about it. There are two main ways in which you can set up as a contractor; you can set up a limited company or join an umbrella company. Both of these offer various pros and cons so it’s important that you think through your options carefully before making a decision.
How to set up a limited company for contracting:
A limited company is one that is legally separated from the people who are running it. This means that the finances of the company are kept separate from the personal finances of the company’s owners. The owners can also keep any profits the company makes after tax. Setting up a limited company means that all of the daily responsibilities of running a business are down to you, and you must also deal with all accountancy and tax issues that arise. While this can sometimes be stressful, one of the main benefits of having your own limited company is that you are in control of all aspects of your business, which gives you a lot more freedom and allows you to make all business decisions.
Setting up a limited company is fairly straightforward, but there are a number of things you’ll need to sort out first. This includes:
- A company name
- A company address
- A director of the company – someone who is legally responsible for running the company.
- At least one shareholder and details of the company’s shares. You also need to ensure that all shareholders agree to create the company and that they all agree on the written rules of the company.
- A Standard Industrial Classification (SIC) code, which describes what your company does.
- Details of people who have voting rights or more than 25% shares of the company.
With all of these to hand, you can go about registering your company. Tax Agility can work with your limited company to ensure that you are fully prepared when it comes to paying taxes and other accountancy issues. Dealing with payroll and keeping an eye on your finances can often be time consuming, but we can take care of all of this for you, leaving you time more to focus on the day-to-day running of your business.
How to set up under a contracting umbrella company:
Being a contractor under an umbrella company is much different than setting up your own limited company. By working under an umbrella company, you cannot be the director of the company and will not have any responsibilities regarding the running of the business. All accountancy and tax matters are also taken care of by the umbrella company. As a contractor, you will complete a timesheet that will be sent to the umbrella company, who will then invoice the client. Ultimately, as a contractor under an umbrella company, you will have fewer responsibilities than if you set up your own limited company, but you can work hassle free and not have to worry about dealing with taxes and the company accounts.
To set up under an umbrella company as a contractor, it is important that you first do your research regarding which contractor umbrella companies are out there. Once you have chosen a company to be a part of, and have been selected by that company in turn, it will be necessary to agree and sign on a contract in which both parties are clear about what they are expected to offer the other. As a contractor, you should be aware that the umbrella company you choose will act as your employer and will keep some of the money you earn to cover holiday pay, for example. Most umbrella companies should be able to set you up within 24 hours though, which means that you can start working as soon as possible.
Tax and compliance
As a contractor, particularly one with a limited company, there are a number of different taxes that you should be aware of:
- Corporation tax
These tax rates vary between 0% to 30% and is payable nine months after your year end.
- Employer’s National Insurance contributions
This is a company related cost that is calculated as 13.8% of your gross salary and is paid monthly.
- Employee’s National Insurance contributions
You may have to pay this monthly tax, amounting to 12% of your salary up to £817 per week, and 1% thereafter.
This is a standard rate of 20% VAT that you will add to your invoices to your clients. This VAT money is then collected by your company on behalf of HMRC and is accounted to them on a quarterly basis. When making the payment to HMRC, you can make claims for company purchases by deducting these costs from the overall VAT.
- Income tax
This tax is paid monthly and is deducted from your entire income as a whole.
- Capital gains tax
This is only applicable when you decide to close your company and make a capital distribution to yourself as a shareholder.
Often, dealing with the range of tax responsibilities that come with owning a business can be difficult and time consuming. Tax Agility are experts in managing taxes and can even provide tailored tax advice to help your business make the most out of your finances.
Accounting and bookkeeping
Being on top of your accounting and bookkeeping is crucial to ensuring that your business stays in the black. It’s important to know how much money you are making from the contracting jobs that you take on, and also to know how much you are spending. Depending on the type of contracting service you provide, it may be necessary for you to purchase materials, equipment and goods, which will help you to complete the job in hand. As well as all this, you should also be aware of your payroll responsibilities.
Having control over your finances is a key part of managing your contracting business successfully. Even if you are a contractor under an umbrella company, it is still a good idea to acknowledge your finances and to be conscious of where your money is going.
Tax Agility are here to assist you with all of your accounting and financial needs. Our experts are well versed in dealing with payroll and managing the books. We can organise your accounts and work on ways to manage your finances that are useful to your business.
What is IR35 legislation?
IR35 is a legislative act, enforced by the HMRC, which applies to businesses that work for a client through an intermediary, such as a limited company. If you go into a contract with a client that identifies you as an employee of the client rather than an employee of your own limited company, the IR35 rules will then apply to you. If this is the case, you can expect to pay around 25% more in tax every year.
Tax Agility can help your contracting company determine whether or not it is at risk of coming under the IR35 legislation. Any tax advantages that you would gain from being a limited company, for example, are all dependent on whether or not the IR35 rules apply to you. So it is important to know if you fall within the IR35 rules before you set up your own limited company, or else you may not see any of these benefits. Getting help from Tax Agility can make all the difference when determining where your business stands. We have an excellent understanding of the IR35 legislation and can help you to make the right decisions regarding your business.
How can Tax Agility help contractors?
Tax Agility are aware that contractors have varied needs depending on the work you do, which is why we offer tailored services that are specific to you. As experts in dealing with taxes and accountancy, we can provide you with the support and advice you need to make informed decisions regarding the finances of your business.
Some of our services include:
- Completing your self-assessment tax return and submitting it for you
- Advising you on pension plans
- Advising you on potential future investments
- Helping to minimise tax liabilities with the use of strategic tax planning
- Ensuring the future of your contracting business is financially secure
For more advice on how we can help you with your financial needs, contact Tax Agility today on 020 8780 2349.