Limited Companies vs. Umbrella Companies
You’re looking for a career change and have decided to work for yourself and become a contractor. However, you’re not sure of the benefits or whether you should set up as a limited company or with umbrella company.
There are many benefits to becoming a contractor. You have more freedom and flexibility when it comes to your hours as well as many financial benefits. All this freedom does not come without added responsibility. Unfortunately, contracting also comes with a great deal of decisions. As a contractor, there are a few options as to how you want to run your business. However, understanding the best course of action can be confusing. Before making the decision, it is important that you understand the different options and all they entail. It is also important to take notice of the new IR35 legislation and how it affects contractors.
Limited Company
The first option for a contractor is setting up a limited company as it means that your personal finances will be separate from your company finances. This is good news for you as your personal finances will not be affected by anything that happens with the limited company making a limited company the most tax efficient option. It is important to note that with a limited company, you usually end up taking home between 75 to 80% of your total earnings.
However, it is important to understand that setting up a limited company means that you will be responsible for administrative and legal obligations for the company. You will be responsible for invoices and payrolls. This can be extremely time consuming and take away valuable time you could spend on your business. Read more for information about the inner workings of Limited Companies here.
Umbrella Company
The second option is to set up an umbrella company which lifts the burden of all the administrative responsibilities off your shoulders. An umbrella company will handle all the administrative details so you can focus on your business. All you have to do is submit time sheets and expenses, something our accountants can help you with. This will save you a lot of time and stress that sometimes comes with a limited company.
While you won’t have to deal with any administrative duties, you will have to pay a monthly fee to the umbrella company. This means that instead of taking home 75 to 80% of your total earnings, you will only take 60 to 65% of them. This can add up when it comes to long term contracting. You can read our page on Umbrella Companies for more details.
Which Should You Choose?
We believe there is no ‘one size fits all’ when it comes to choosing between a limited and an umbrella company. The answer widely depends on your goals as a contractor and we understand that everyone has different business goals. If you will only be contracting for a short amount of time, it might be more beneficial to set up an Umbrella Company. For long term contracting, a limited company may be the best option to maximise your profits. However, short term versus long term contracting are only two variables that go into the decision. At Tax Agility, we can look at your business to help you determine the best course of action for you personally. It is important to chose the option that brings the greatest benefits to you, and we can help you do that.
Making serious decisions such as this can be difficult. Call us on 020 8780 2349 to arrange a meeting with us so we can discuss which option is best for you.
Accounting & Bookkeeping for Contractors
On April 6th 2017 the new IR35 tax rule was made official. The goal for IR35 legislation is to ensure the people who benefit from tax savings are honest contractors while transferring those who should be ‘employed’ back to paying the correct PAYE payments. If you are a contractor affected by this new legislation, our chartered accountants at Tax Agility can provide help and advice.
Contractors are professionals in their field who work through their own limited companies instead of as employees of other companies. As a contractor, freelancer or consultant, you are your own boss. As great as that sounds, it also means you have to manage all of your own accounting matters, which can become overwhelming particularly when you’re already busy dealing with customers and projects. If bookkeeping and accounting are your top concerns, check out this page titled Accounting and Bookkeeping for small business.
How do we help you?
Tax Agility offers a number of services to help contractors from providing an extra pair of hands to simply giving you practical, jargon-free advice. So how do we help exactly?
Reminders of important dates and deadlines
There are various datelines for annual accounts, annual return, VAT returns, employer annual returns (P35, P14, P11d) and personal tax returns. As a contractor juggling different tasks, you might forget about these important dates. At Tax Agility, we will manage all your tax deadlines to ensure your returns are submitted as required and on time. Click here for more information on Contractor Dates and Deadlines.
Contractor Accountancy packages
We offer personalised contractor accountancy packages to suit your needs. Whether you’re about to set up a limited company or already have one set up and you need an ongoing management package, we can help. Our packages are designed to help manage ongoing returns and administrations and best of all, they are affordable. All our packages start with a face-to-face meeting so we get the chance to understand your business, learn your individual needs and discuss which package is best for you. Click here to read more about Contractor Packages and Fees.
Straightforward, practical advice
If there are questions and uncertainty when setting up your contractor business - for example: should you set up a limited company or work via an umbrella company? What’s the most tax efficient method to operate? Does the new IR35 tax rule applicable to you? - all of these are valid questions require an honest answer. We will explain your questions and help guiding you through all the legal and financial requirements of becoming a contractor.
If you want to know more about how we work with contractors, talk to us on 020 8780 2349 or complete the enquiry form and we will call you back. The Tax Agility team is here to help, which is why the first consultation with our team of chartered accountants is free of charge.
Are You Aware of the New IR35 Update?
IR35: the change is coming
A week ago, a firm which has active contracts with the Ministry of Defence became the first private company to ban workers who are limited companies. It simply told its hundreds of “Ltd” workers it has on-site that they must switch to an umbrella company or quit.
Traditionally, a contractor, or a self-employed person, usually chooses to set up a Limited Company or work through an Umbrella Company (you can click here to read a page which we have put up summarising the pros and cons of limited vs umbrella company). Most contractors choose to set-up a limited company because this is widely considered to be the most tax efficient method to maximise your take-home pay. Why? Because a limited company allows contractors to claim various expenses and paying lower taxes by taking a dividend instead of a full salary.
So the government is bringing in a new legislation which will ensure that contractors who are doing the same job as an employed worker are not getting a higher take-home pay simply because they work through a limited company. In addition to that, the government is also making changes to umbrella companies - one such change is contractors working through an umbrella company cannot claim travel and subsistence expenses. The bottom line is: the new IR35 legislation will ensure that people who benefit from tax savings are honest contractors, while moving those who should be ‘employed’ back to paying the correct PAYE payments.
Public Sector
It’s important to point out that this legislation will only affect public sector clients and placements. Private sectors are not affected (yet).
From 6 April onwards, every public sector department is required to go over their need for contractors - reviewing the contracting roles and seeing if the roles could be replaced with standard employees. Public sector departments also need to review their off-payroll contractors making sure they work through an umbrella company or on PAYE.
Another point to note is: IR35 status for Public Sector Contracting will be determined by the client, not the contractor.
As a result of these changes, we anticipate that most public sector contractors are likely to go on an agency’s PAYE scheme instead of going to an umbrella company, as there is not much difference between the take home pay through the agency’s PAYE vs an umbrella company.
Still confused? You’re not alone, because tax is a complex subject. The good news is, our team of London chartered accountants at Tax Agility is here to help. We will first seek to understand your situation, then see how the new legislation will affect you. This is why we always offer the first consultation free of charge. Call us today at 020 8780 2349 or complete the enquiry form and we will call you back.
Tax Saving Tip for the Self-Employed, Part II
Last week we received good feedback for our article on reducing the tax bill for contractors and self-employed individuals through tax free allowance and not paying your National Insurance once you have reached the retirement age. This is why we want to continue the theme this week and explore other legal and honest ways to reduce your tax bill.
Home expenses
Many contractors and self-employed entrepreneurs start their business from home. Naturally, you are allowed to include a certain proportion of home expenses (electricity, gas, and a percentage of your mortgage or rental cost) as a genuine business expense. There are no hard and fast rules regarding what you can claim as a reasonable deduction as everyone’s arrangements are different. However, the key is to ensure a reasonable argument can be made for the basis for any calculations. For example, it is rather foolish to claim a deduction for 2 to 3 Starbucks coffees per day while you also claim an allowance for being at and working from home 5 to 6 days per week.
Smaller Allowances Add Up
There are many smaller allowances which go unclaimed but they can add up and benefit your overall tax bill. Two examples are deductions for eye test and the approved schemes for using a bicycle as your mode of transport. Another one is claiming millage when you use your car, motorcycle or bicycle on company business. 45p, 25p and 20p are the maximum rates per mile that companies can pay or business owners can recoup without tax being paid for the use of one's own car, motorcycle or bicycle. One exception to this is that National Insurance arises if you exceed a certain number of annual business miles per annum, but realistically this will not be reached unless you are a full time sales rep on the road.
It is also important to note that the Tax Authorities can be particularly picky regarding the distinction between business and personal millage when using your own vehicle for both. It is therefore advisable to keep a mileage log that records of all business journeys taken, then they can be clearly differentiated from miles driven for personal purposes.
At Tax Agility, we always strive to give the best tax advice that is unique to your circumstances. This is why we always offer our first consultation for free to allow us to learn about your business and your personal financial circumstances, so we can create a tax accounting solution that is as unique as you.
Call us now at 020 8780 2349 or complete the enquiry form and we will call you back.
Tax Saving Tip for the Self-Employed
As chartered tax accountants, tax is a topic which we discuss with our clients on a daily basis. In this day and age, almost all of our clients know they can go to the Internet for tax advice, but often what they get is generic information. Case in point: there are plenty of materials on the Internet advising how a self-employed person can reduce their tax bill and most of them usually begins with, “check your tax code…” – but hardly anyone mentions tax free allowances or even how pensioners can be exempt from National Insurance when they become self-employed. This is why we’ve been motivated to write this post, with the aim of highlighting these often overlooked areas:
Tax Free Allowance
A married couple have a tax allowance each and some arrangements can maximise the total benefit of this. Let’s take a common scenario where one spouse is an entrepreneur and the other is staying at home to bring up the children. The stay at home partner could be allocated tasks from their husband or wife’s workload, and be paid from the entrepreneur's business for doing so. This could provide the stay at home partner with an income that is effectively tax free if the income is less than their annual Tax Free Allowance. Similarly, the Entrepreneur can use the payment as a deduction from their taxable income, possibly reducing their tax bill too. This win-win situation is legal, but often overlooked by entrepreneurs and small business owners.
Self-Employed After Pension
We have seen many pensioners going on to set-up a small business which helps to keep them active, mentally and physically. If you fall into this category, i.e. you’re still working beyond the Government’s official pension age, you should cancel any National Insurance payments to HMRC. Continuing to pay into the scheme will not make any difference to the state pension that you are entitled to. However, you do need to make a formal application to HRMC about this. The UK government has been making radical changes to the state pension ages. To find out your current pension age, click here. And, in 2020, the state pension age is to be increased to 66 for both men and women.
At Tax Agility, we believe in delivering a highly-personalised tax service to our clients. This is why we always offer our first consultation for free to allow us to learn about your business and your personal financial circumstances, so we can create a tax accounting solution that is as unique as you.
Call us now at 020 8780 2349 or complete the enquiry form and we will call you back.
How UK Contractors are Affected by Brexit
It’s been a couple of months since the Brexit vote, and while the dust has slowly been able to settle on what was an unquestionably surprising result, we’ve had the time to look into the ways in which British contractors are likely to be affected from our leaving the European Union (EU).
It’s important to note that though the Brexit vote has resulted in some immediate changes to the British economy, including but not limited to the weakening of the pound, new Prime Minister Theresa May has made it clear that the earliest that Britain would give its ‘notice’ to leave the EU, by triggering Article 50, won’t be until the first few months of 2017, after which there will be an up-to two year negotiation period before any changes begin to take place.
Homegrown Legislation is Greater Pain
One of the driving forces of the leave campaign was their assertion that, outside of the European Union, Britain would be able to drop all EU laws as we pleased. This includes the Agency Workers Regulations (AWR); a piece of EU legislation that has proven to be contentious among British contractors.
But there’s a twofold problem here. Firstly, if the UK is going to retain access to the single market then we’ll have to continue to abide by certain EU laws. Secondly, many contractors agree that certain pieces of homegrown legislation, such as IR35, are a much greater pain for contractors to negotiate than anything the EU has thrown their way.
Trade and Immigration Changes
The changes to trade and immigration, especially with regard to working in EU countries (more on that below), is an area in which it’s difficult to predict what is likely to happen.
There’s a good chance that the UK will stay a part of the single market, at least “in some form,” as was former Prime Minister David Cameron’s wording prior to the vote. Depending on how much a part of the single market we remain will make a big difference to the changes British contractors can expect to see post-Brexit.
Contracting in European Union to Require More Hurdles
Contracting in Europe, that is, travelling to Europe to fulfil contracts, or simply selling our services to European customers from home, is an already complicated affair. Britain’s exit from the EU is only going to create more hurdles for contractors looking to work in and with EU countries.
Depending on what trade deals and free-movement of people deals are put in place (with visa-waver schemes potentially having to be set up), these hurdles may be small or they may be great. Only time will tell, but it’s highly unlikely that UK contractors will be shut out of the EU altogether.
Experienced Contractor Accountants
To speak with a professional accountant to discuss how Brexit may affect your contracting business, both at home and abroad, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Contractor Tax Changes and How They Affect You
After all the goings-on of the last six weeks, Budget 2016, which took place in the middle of March, seems a lifetime ago.
Despite this, and despite the fact that then-Chancellor of the Exchequer George Osborne has since been replaced by Philip Hammond at the hands of new Prime Minister Theresa May, all of the tax changes (or upcoming tax changes) for contractors that were underlined by Mr. Osborne at Budget 2016 still hold the same weight as they did before the Brexit vote.
Contractor Tax
For a more detailed look at the ins and outs of Budget 2016, you can read our key takeaways for contractors, companies, and individuals. For now, here are five of the most important contractor tax changes you should be thinking about right now:
Capital Gains Tax (CGT) Reduced to 20%
In a huge boon to tax payers across the income spectrum, from April this year CGT was reduced from 28% to 20% for higher rate tax payers, and from 18% to 10% for basic rate tax payers. This change doesn’t apply to gains made from residential property however, which remains at its former rates.
Travel and Subsistence Tax Relief Scrapped for Some Contractors
With contractors facing the prospect of mandatory IR35 testing from April 2017, Travel and Subsistence tax relief between your home and your working location was scrapped in April for temporary contractors working through intermediaries, such as umbrella companies. Contractors whose work doesn’t fall under IR35 may still claim the relief.
Contractor Class 2 National Insurance Contributions Discontinued
Though the details are still somewhat cloudy, what we do know is that from 2018 Class 2 National Insurance Contributions for contractors will be discontinued, potentially saving contractors making a profit of £5,965 or more per year £2.80 per week. We say potentially because there’s a good chance that some, if not all, of this cost will simply be transferred to your new Class 4 National Insurance Contributions.
£1,000 Allowance for ‘Sharing Economy’ Workers
Touched upon in detail five months ago, with the government having recently recognised that traditional taxation methods don’t work for new-age contractors who are earning small and one-off payments as part of the sharing economy, a new tax-free allowance of £1,000 a year is to be introduced for those earning income through both through trade and property (Airbnb hosts rejoice).
Removal of National Insurance Employment Allowance
In a topsy-turvy turn of events, the withdrawal of the National Insurance Employment Allowance for contractors acting as single-person companies is set to go ahead, while Entrepreneurs’ Relief for multi-owner companies is set to be restored. Entrepreneurs’ Relief will also be offered to external investors in unquoted companies, though the details of this arrangement are still being consulted on.
Experienced Contractor Accountants
To speak with a professional accountant to discuss how these tax changes may affect you as a contractor, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Budget 2016: Key Takeaways for Contractors
Following on from this morning’s summary on the key talking points from Budget 2016 for individuals, below we’ve summarised the key talking points for contractors from Chancellor of the Exchequer George Osborne’s eighth full Budget.
Keep an eye out for our article summarising Budget 2016 for small and medium-sized businesses (SMEs), coming later today.
New Tax Allowances for ‘Sharing Economy’ Workers
One of the biggest takeaways from Budget 2016 from the point of view of contractors was that the Chancellor has, finally, recognised how traditional taxation methods have been having a negative impact on contractors earning small and one-off payments as part of the sharing economy.
Speaking to the House of Commons, Mr. Osborne said:
“We’re going to help the new world of micro-entrepreneurs who sell services online or rent out their homes through the internet. Our tax system should be helping these people so I’m introducing two new tax-free allowances each worth £1,000 a year, for both trading and property income.”
The Chancellor continued by noting that there will be no forms to fill out in order to benefit from this tax break, before claiming that at least 500,000 people will benefit from this change.
Class 2 National Insurance Contributions for the Self-Employed to be Scrapped
The other big announcement, from the point of view of contractors, was that Class 2 National Insurance contributions (NICs) for the self-employed are due to be abolished from April 2018 in favour of the benefits of Class 2 NICs (primarily entitlement to the State Pension) being combined with the benefits of paying Class 4 NICs.
Currently costing contractors and self-employed individuals making a profit of £5,965 or more per year £2.80 per week, from April 2018 you will only be required to pay Class 4 NICs, though it is unclear whether the current weekly cost of Class 2 NICs will transfer directly to the new Class 4 NICs.
Business Rates Abolished for Properties With Value up to £12,000
One of the biggest talking points from Budget 2016 was that of business rates being abolished for all business (commercial) properties with a rateable value up to £12,000, from April 2017. There will also be a ‘tapered’ relief rate on properties between £12,001 and £15,000.
With the current relief rate set at just £6,000, this poses a hugely beneficial increase for small businesses and contractors working from a commercial space. The government estimate that under the new rules 600,000 small businesses will pay no rates at all.
Personal Allowance to Increase to £11,500
Touched upon in this morning’s key talking points for individuals summary, and seen equally as a boon for contractors, from April 2017 the personal allowance will increase to £11,500 (after rising to £11,000 next month).
The personal allowance was just £6,500 when the Conservatives were elected six years ago, displaying an almost 100% increase.
Understanding Budget 2016
To speak with a professional accountant to discuss the impact of Budget 2016 on you as a contractor, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
More Information
If you're interested in the Budget 2016 changes and the impact they'll have on you, feel free to check out our other pieces on the impacts of George Osborne's changes:
Budget 2016: Key Takeaways for Companies
Budget 2016: Key Takeaways for Individuals
What is the 24 Month Rule for Contractor Expenses?
The 24 month rule for contractor expenses is a law that allows contractors to receive tax relief on travel expenses should you be required to travel from your home to a temporary working location for a period of 24 months (two years) or less.
If you qualify for such relief it will be paid to you, tax free, directly by your employer. Under the law, travel expenses refer to all reasonable costs that are incurred as a direct result of you having to travel from your home (permanent residence) to your temporary working location.
The Rule Defined
The 24 month rule for contractor travel expenses only applies towards the first 24 months of you being asked to work from a temporary working location if the contract is expected to last for no more than 24 months.
If the contract signals a permanent move, or the move is to last for more than 24 months, no relief will be available for any period. If, however, halfway through a shorter contract your temporary location becomes permanent, or the contract is extended so the total time at your temporary location will exceed 24 months, relief is no longer available from that point on, but relief claimed up until that point may be kept.
Similarly, if you’re asked to work full-time from a temporary location for longer than 24 months, but several (or many) months into your contract at this location your time there is shortened to less than 24 months, you’ll be able to claim relief on the remaining months you have at your temporary location, but you won’t receive relief for the months up to that point, as at that time your contract was intended to be longer than the two year threshold.
What is a Temporary Working Location?
A temporary working location, for the purpose of the 24 month rule, is any location that you aren’t expected to be at (and ultimately aren’t at) for longer than two years.
You should note, however, that if your temporary working location is close enough to your permanent work location that it doesn’t prompt a dramatic change in the journey you take or the cost incurred to get there, with your journey from home remaining largely the same, you won’t be able to claim relief, regardless of how short your temporary working contract is.
Qualifying Exceptions
There are, of course, exceptions to the rule.
If you’re required to work one day a week from a temporary location for a period longer than 24 months you’ll still be able to claim relief for your weekly journeys to your temporary working location because you won’t be spending more than 40 percent of your working time in this temporary location (you’ll be spending just 20 percent, in this example).
If you’re in your job for less than two years, or you’re moved to a new permanent working location, you cannot claim relief as at every stage your working location is considered to be permanent.
How to Take Advantage of the 24 Month Rule for Contractor Expenses
Hiring an accountant to take care of (and organise) your contractor expenses is a necessary business investment if you wish to spend less time worrying about what you’re owed, and more time focusing on your work.
To speak with a professional accountant to discuss the the process of claiming for contractor expenses, or for any other questions, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no-obligation meeting.
Self-Employed Business Expenses Explained
Understanding what does and doesn’t constitute an appropriate self-employed business expense is one of the toughest challenges recently self-employed business owners have to face.
Knowing the difference between an allowable business expense vs. a non-allowable expense can help you avoid not claiming for something you legally have a right to claim for, and having to have an awkward conversation with HMRC should you make an incorrect claim.
Though you should always keep in mind the fact that any expense you claim for must be the result of something that is ‘wholly and exclusively’ for business purposes, the below summary should give you a much better idea of what expenses you can confidently apply for.
It should be noted that you cannot claim expenses on items you purchase to keep and continually use in your business, such as laptops, desks, or vehicles. In the majority of circumstances these can be claimed as capital allowances instead.
Read more