For those thinking of becoming a contractor for the first time, you’re bound to have a few questions. Leaving the world of full-time employment to offer your services independently is a big leap, and we’re proud to have supported many of our clients on their journeys contracting across a variety of fields from IT, engineering, HR and marketing to name a few.
Here, we answer a some of the frequently asked questions when embarking on a new venture into contracting…
From this hourly rate / day rate contract I have been offered, what will be my take home pay?
This is the proverbial piece of string question; we have developed an online contractor calculator to give you a good indication of what you should expect to take home from one tax year to the next.
The calculator can only give you an indication of your take home pay. At Integro Accounting we know every client is unique and strongly advise you to contact us and spend just a few minutes confirming your situation. We can then give you an accurate tailored answer to what you can expect to take home.
I have a contract of £xyz, should I be taking the umbrella route or the limited company option?
There is no hard and fast rule as to whether you should operate through limited or umbrella based on your contract rate, but rather a consideration based upon a few different factors; namely the length of your contract, your earnings in the same tax year, and more generally your preference, and the preference of your client.
If your contract is for 6 months or less, the umbrella route could be the better option for you – simply because there is slightly more administration involved when you’re the director of limited company, such as submitting annual company accounts and corporation tax returns whereby you’d benefit from using an accountancy firm.
Earnings in the same tax year should also be considered – there are benefits to going limited whereby as a director you can pay yourself a mix of dividends and salary to maximise your take home pay after tax.
As every client is different, it’s a very individual choice, some prefer the freedom when going limited, and some will be stipulated to by their client’s contract with them.
If you contact one of our accountants and spend a few minutes going over your situation, we will then discuss which route is going to be best for you and supply you with the figures and our calculations to back this up.
Here. We’ve summarised the advantages and disadvantages of both limited and umbrella routes.
I want to switch from working via an umbrella to working through my own limited company, is this easy?
It is surprisingly straight forward to do this; the first 3 steps are simply to:
- form a limited company
- speak with your client and / or agency, advising of your intent
- open a business bank account
Once you have the above underway, then it is normal for you to arrange business insurances for the company and to do a little research on who to retain as tax and accounting advisor; at this point we strongly recommend that you contact us for one of our free face to face meetings.
For those needing the flexibility of switching between umbrella and limited, inside or outside IR35, we have just the solution – our Easy Switch package. We also offer a company formation service if you’ve already decided this is the route for you and are keen to get things underway.
How do I pay myself?
There are a collection of different ways that your company can pay you, the two main ones are salary and dividends. You can pay yourself a salary as director and dividends as a shareholder as well as reimbursing yourself for any expenses you incur on behalf of the company.
The first time you speak with your accountant should start with them taking the time to make sure they understand your situation and work out the most tax efficient method for you to be paid by your company.
Our guide or Salary Vs Dividends outlines the benefits of being paid via a mix of the two methods, with some examples of take home pay.
Your accountant should make sure you understand and are happy with how your company is paying you, whilst also making sure it is the most tax efficient way available.
Do I need a contractor accountant, or can I do it myself?
Every new business will carefully consider their outgoings, so this is a very valid question. There isn’t a legal obligation to have an accountant, so it’s a case of considering exactly what they’ll do for you, and whether you’d have the capacity to do this yourself, or whether you’d rather free up your time to concentrate on what you do best.
Of course, there’ll be your personal tax affairs on top of your limited company’s affairs which could include payroll, VAT returns, Corporation Tax returns, company accounts and more – not to mention ongoing support and proactive advice to get you into the best financial position possible.
Here’s a couple of guides for further reading on this:
Choosing a contractor accountant
Do I really need an accountant
Should I be VAT registered?
If you’re earning over £85,000 per year, then yes, it’s compulsory that you register for VAT, although some choose to when their earnings are under this threshold. There’s a full explanation of the benefits of registering for VAT, why you might want to do this, what type of VAT scheme to use, and how you go about it registering for VAT in our VAT guide for contractors.