The Ultimate Guide to Contracting...
What is a contractor?A contractor is generally someone who works either as self-employed or through a limited company for one or a small number of employers.
Contractors are likely to get paid a significantly hourly rate than regular employees and working hours are likely to be much more flexible. However, as a contractor you won’t be entitled to paid holidays, sick pay or maternity pay.
Contractors work in a variety of industries with the most popular being IT contracting and Offshore Contracting. In addition to these, locum doctors, dentists, opticians and pharmacists can also be considered contractors.
In general locum doctors, dentists, opticians and pharmacists mainly contract on a limited basis with this work being in addition to their full or part-time employment contracts.
For IT contractors and Offshore contractors, however, the contracts are usually their only or main source of income.
As a contractor you will have to invoice the company on a monthly basis and pay your own taxes separately – but you can also claim expenses & reduce your overall tax burden.
Sole Trader vs. Limited Company? The Pros & Cons...The following is a very brief explanation of the difference between a sole trader vs a limited company. For a full explanation of the differences between sole traders and limited companies click here.
A limited company is a separate legal entity from a sole trader and has many tax advantages over trading as a sole trader.
The main advantages of trading through a limited company are;
The disadvantages of trading through a limited company are;
If you are in the IT or the offshore industry, your employers may insist that you operate through a limited company. Most IT contractors and off-shore contractors the pros of setting up a limited company usually outweigh the cons.
What is an umbrella company?An alternative to setting up a limited company is to operate through an umbrella company.
An umbrella company is a company is an intermediary company that acts between you, the Contractor, and your Employer. If you choose to use an umbrella company you are basically employed by the Umbrella company.
The main company pays the Umbrella company and the Umbrella company paid you using a salary and dividend. The Umbrella company will charge you a fee for processing your wages and your monthly dividend.
The main advantages of forming your own limited company rather than using an Umbrella company is that you are more in control of what can be claimed in expenses and its generally cheaper to administer as you don t have high fees.
How do I set up a company for Contracting?Setting up a limited company is extremely easy and quick. Email us or call us on 0141 334 2620 or click on this link for more information on a detailed analysis of sole traders vs. limited companies.
How do I get paid from my company?If you operate as a limited company, the most tax efficient way to get paid is by taking a combination of salary and dividend. In the tax year 2018/2019, the most tax efficient salary level is £7,880. Anything over this level, you can take as a dividend.
What is a dividend?A dividend is simply a distribution of profits. Note, dividends are taken AFTER tax has been calculated. Therefore dividends are not classed as an expense to the company.
How do I take a dividendDividends can be taken at any time. However, its best to take on a regular basis, say once per month or once per quarter. This way if you are ever looking for a mortgage it is easier to show regular income rather than if you take out money ad-hoc.
Should I take a dividend or salary?Both! In order to obtain state benefits such as the state pension and unemployment benefits you must have paid national insurance contributions.
However national insurance contributions are only payable if you are paid via the PAYE system. National insurance contributions are not payable via dividends.
In terms of amount, the lowest level of salary you can take to ensure NI contributions are met is £7,600 per annum. Click on this link to download our contractor salary calculator.
What expenses can I claim as a contractor?This is one of the most frequent questions asked and one which causes the most confusion.
Basically if you operate as a limited company you can claim any expenses that are truly business related. So if you are required to travel between places of work, if you have to buy safety clothing, if you have to buy a computer to perform your duties, then all of these can be claimed as a deduction.
The main area of confusion is in the area of travel expenses. So can you claim travel expenses? We’ll yes and no!
In general you can claim for the cost of moving between places of work. So, if your office is in Glasgow and you travel to Aberdeen to see a client, then the travel expense is tax deductible.
You cannot, however, claim for travel between your home and your place of work. So, what if your home IS your office? We’ll generally, yes you can claim. However, HMRC have a 24 month rule & a 40% rule.
If you spend less than 40% of your time at the location you are ok and can claim travel expenses. However, if you spend MORE than 40% of your time at the location, travel expenses are only allowable if you don’t expect to work in the location for up to 2 years. After 2 years you will not be able to reclaim expenses.
Note, you must stop claiming travelling expenses once you become aware that you are likely to in a location for more than 2 years. So, if your contract is for 3 years, then you cannot claim ANY travel expenses for the entire duration. Be aware! You can’t claim the first 2 years then not claim the 3rd year!!! The whole 3 years is non-claimable.
Claimable Contractor Expenses...
Telephone for business use
Home / Office Expenses*
Legal & Professional Fees
*Call us on 0141 334 2620 for more information
What is IR35?IR35 legalisation was brought into effect in 1999 to try to eliminate the practice of employers avoiding tax and employment legislation by allowing employees to operate via limited companies instead of being directly employed.
These workers were called “disguised” workers. To check your employment status, click here.
Do I need contractor insurance?Typically your employer will insist that you have insurance before they will allow you to trade via a limited company.
The minimum that they will ask for is Public Liability Insurance and employers liability insurance. If you provide professional services they may ask for professional indemnity insurance.
Public liability and Employers liability are usually very cheap (less than £200 per annum). Professional indemnity insurance is likely to me more expensive, typically £500+
We recommend the online insurance broker, simply business Simply Business who can have you up and running in 10 minutes.
Do I need to become VAT registered?The VAT threshold for 2018/2019 is £85,000 per year of SALES income. Therefore, once your sales reach this level you MUST register for VAT. Note that the £85,000 is your income before any costs are taken off.
However, even if your sales are under £85,000 you can register voluntarily. But why would you register voluntarily for VAT?
Well if you are VAT registered, you need to charge VAT on all invoices you send out, but you can also claim back VAT on all your expenses.
Therefore, if all your customers are VAT registered and you buy a lot of materials on which you pay VAT, then it’s definitely beneficial to register for VAT.
In summary, its best to register for VAT if you meet the following conditions;
a) Most of your customers are VAT registered and they can therefore reclaim the VAT that you charge them, and; b) You buy a reasonable amount of goods and services and therefore have quite a lot of VAT that you can reclaim on these purchases. Definitely don’t register for VAT voluntarily if you the majority of your customers are the general public and therefore cannot reclaim VAT that you have to charge them. If you do so, you will be at a competitive disadvantage from your non-registered competitors.
What is the Flat Rate Scheme?The flat rate scheme was introduced to simplify the calculation of VAT. Using the Flat Rate Scheme, calculating VAT is done by multiplying your income by a fixed flat rate percentage.
Your income is the amount you actually receive. So if you send an invoice our for £100 + VAT, the figure that you use to calculate the VAT is £120.00 and not £100.00!
The Flat Rate percentage is determined by HMRC current rates can be found here.
Note, in the first year of VAT registration, you can get a 1% discount on the flat rates above.
What is a Limited Rate Trader for VAT purposes?
From 1st April 2017, HMRC introduced the concept of a “Limited Rate Trader”.
Basically, this was done to restrict the amount companies could benefit from VAT if your goods cost less than 2% of your turnover or if they total less than £1,000 per annum.
So what are goods for the purposes of Limited Rate Traders. Well, HMRC define Goods as “moveable items or materials exclusively used in your business. You can also include gas and electricity”.
What you can’t include in your good calculation is as follows;
any services - which is anything that isn't goods
expenses like travel and accommodation
food and drink eaten by yourself or your staff
vehicle costs including fuel unless you're in the transport business using your own, or a leased vehicle
rent, internet, phone bills and accountancy fees
gifts, promotional items and donations
goods you will resell or hire out unless this is your main business activity
training and memberships
capital items for example office equipment, laptops, mobile phones and tablets.
If the above applies, then you have to use a flat rate percentage of 16.5%.