Many contractors contract through a limited company, as this is the most common tax-efficient way to run your business, particularly if the punitive IR35 rules do not hook you.
Other contractors who don’t want to deal with any paperwork are contracting for a short period. They might have a contract through an umbrella company, as this represents without hassle to a contract.
So, what are the benefits and disadvantages of choosing between a limited company and being a contractor?
Pros of using a limited company.
Total control: As a director of your own business, you have complete control over all transactions and income, including the management of invoicing.
You choose how you want to get paid: Being self-employed, you will pay yourself a wage. However, if you are on a high tax rate, it is possible to leave money in the business account for a duration of time so that it can be drawn later at a lower tax charge.
Reliability and flexibility: Having a business with a trading name can improve your reputation when applying for new assignments. It also provides you with the flexibility to undertake the ad-hoc job for a different seller should you wish to do so.
Tax exemptions: As a counter to higher personal income tax rates on your wages, being a director of your limited firm will mean you get dividends, which you do not pay National Insurance on. You can split the company shares between yourself and your partner so you can both use your personal tax allowances and base rate bands. Besides, you can register for VAT at a low rate which may also improve how much they can earn.
Handling administrative duties: Establishing a limited company and related business bank account can take time and require you to complete a fair bit of paperwork. You also need to set yourself reminders to file returns with HMRC and Companies House, including an end of year self-assessment and your P35 and P60 tax forms. Your chance of being hit with tough penalties if you miss fulfilling these obligations.
Accountant charges: Limited company accounts are expected to be signed off by an adequate accountant who will provoke an annual fixed cost. If you choose to do the administrative to do the books yourself, you must prepare to have an accurate record of your invoicing and VAT.
Insurance charges: As a self-sufficient contractor, you will require to pay for professional liability insurance. This insurance keeps the company you provide your services against any damages or financial deprivation that you are liable for, so you won’t get hired anywhere unless you have it.
International force: It is a lot more complex for limited companies to operate outside of the territory of registration, which may imply it isn’t a viable choice. You should seek expert advice if you aim to work on contract assignments overseas through a limited company.
Pros and cons of being a contractor.
Increased profit: you can find your advantage from increased profit in two ways:
• if your payment is more per hour/day than an equivalent worker.
• if your tax status possibly makes you take home more net pay than a worker.
Flexibility: Employees generally must turn up to their job between set hours five to seven days a week, with limited time off. Contractors can by themself decide when to work and when not to, and a lot of contractors have more control over working hours and locations.
Holidays: When you are among contracts, you can choose to take as much or as short of time off as you like. Plus, you are earning more, you have to work less to make the exact figure of money as when you were employed.
No more office politics: Contractors are self-sufficient from their customers, and unless in an interim management position, they do not become line managers. You no longer have to talk with your boss about that promotion/pay rise/have some time off. You are your own boss! There is no stress for you to put in extra hours, work weekends, or push for promotions to assure wage increases (if you want more money, you can choose a better-paid contract).
Staying in the contract: You require to find a safe and ongoing stream of contracts to guarantee you continue to earn enough to make a living. That may need you to get involved with a recruitment agency and pick up the skills they need, or you may need to invest in sales and marketing directly to clients.
Downtime among contracts: If you are not working, you don’t get paid. But from learning contracting skills and keeping your technical competence up-to-date, downtime should be less.
Safety net: You no longer have an employer that will pay you if you are unwell or offer benefits such as a death in service life insurance, medical insurance, or a pension. You have to take liability for each of these aspects of your physical and financial wellbeing.
Holidays: Contracting is not like employment when you get paid holidays. If you don’t work, you don’t get any money. What you must find, though, is that you are earning so much more than you can afford to have some time off.
If you would like more information, please contact our customer engagement team who would be delighted to assist you further.