So you’re bored with your job, tired of working for someone else, and thinking about riding solo as a full-time contractor? Here are three questions to ask before taking the plunge and choosing a freelance lifestyle.
1. Do I understand what it entails?
The first thing to be sure of is that you’ve done the necessary research and understand both the pros and the cons of contracting. If you’re only thinking about the positive aspects, you might leap too quickly; if you’re focused only on the pitfalls, chances are you’ll never make the move. Speak to friends and family who are already successful contractors and gain as much insight into the contracting world as you can. Here’s a brief run-down:
- Pros: There are many positive reasons to become a contractor. These include a more flexible lifestyle with the freedom to choose your own contracts, locations and hours; the potential to earn more money (because contractors generally earn more per hour or project); the opportunity to gain more varied experience that you might not gain working for one employer; and the possibility of saving substantially on tax
- Cons: Without a doubt, contractors have less security than the permanently employed; there’s more admin to take care of as a freelancer; and there’s a considerable amount of added responsibility – it’s now up to you to find work and make the salary you need.
If you feel the pros far outweigh the cons, the next question is how to best structure your business.
2. Limited company or umbrella payroll?
As a contractor, there are two basic trading options available to you: you can work through an umbrella payroll company or you can form your own limited company. Each option has its own set of advantages and disadvantages.
Limited company: advantages
- You may claim back on a wide range of expenses, including accountancy fees, certain equipment, mileage and more
- This is a relatively risk-free option, as your personal assets are not at risk should the limited company be declared insolvent
- You have access to the flat rate VAT scheme, which lets you keep some of the VAT you receive from your clients
- You have control over your finances and decide what salary to pay yourself and when to draw dividends
- You can structure your remuneration very tax-efficiently
- You can employ people to work for you.
Limited company: disadvantages
- You are responsible for all legal compliance issues, including all statutory and government requirements, as well as day-to-day functions like invoicing, liaising with your accountant and making sure all forms and returns are filed and submitted on time.
Umbrella payroll company: advantages
- This is the easiest option for first timers and contractors who might go back to permanent employment at some stage
- You enjoy the freedom of a contractor lifestyle; with all the benefits of full-time employment, including substantial tax savings
- The umbrella company issues invoices on your behalf and processes payments from your clients or agency, leaving you with very little admin to do. 1st Contact Umbrella also gives you access to additional benefits like sick pay
- You only pay for an umbrella company’s service when you are paid, i.e. they process a timesheet for you.
Umbrella payroll company: disadvantages
- You cannot represent yourself as the director of your own company, and you will have certain procedures to follow with your agency and your umbrella company, so in some instances, there may be duplication of paperwork
- You cannot structure your remuneration as tax-efficiently as with a limited company.
One you have figured out which option is best for you, it’s important that you understand the legal and financial aspects you will need to consider.
3. Financial and legal considerations
Whether you choose to be an independent contractor or set up a limited company, you’ll need to ensure that you’re compliant at all times. Your accountant or payroll consultant will be able to give you more advice and information about the following issues:
- National Insurance (NI) contributions: As a contractor, you’re liable to pay employees’ NI contributions as well as employers’ NI. But without an NI number, you won’t be able to claim back any overpaid tax
- Pension: Pension is an extremely complex issue, but it is also one of the most efficient ways to reduce your PAYE and NI liabilities
- Insurance: There are insurance policies available to protect you in the unfortunate event of an accident claim against you. Speak to your payroll consultant or accountant about your options
- VAT: If you’re working through an umbrella payroll company, you don’t need to worry about VAT as it will be included on your invoices and the umbrella company will pay the amounts due to HMRC on your behalf. However, as the director of a limited company, it will be your responsibility to ensure that you take care of your VAT obligations in a timely manner
- Tax refunds: It might happen that you overpay tax as a contractor, or because you leave permanent employment during the tax year. Provided you have all the paperwork necessary, finding out whether you are owed a tax refund is a pretty simple process. It’s therefore important that you keep your P45s and P60s safe when you leave permanent employment.
If you need any help regarding your decision to move into contracting, speak to a professional, friendly 1st Contact accountant. For more information regarding limited company formation, visit 1st Contact Accounting – or visit 1st Contact Umbrella to find out more about umbrella payroll for contractors.