Here is Fusion’s guide for first-time contractors. If you want more in-depth advice please get in touch to ask about becoming a client of ours.
What are the benefits of contracting?
There are various reasons people usually choose to work as contractors rather than employees. These reasons include: earning more money for work while being able to pay lower taxes (a specialist contractor accountant can show you how to achieve this), more choice over when and where to work, not being tied down to working with people you don’t like, and being your own boss.
What are the disadvantages of contracting?
There are, however, some disadvantages to contracting, such as: having the added responsibilities brought on by having to manage your own business; reduced job security, since jobs for contractors are usually temporary; and often having to move house or travel a lot for work.
What’s the best way for contractors to find work?
The most common way by far for contractors to find contracting jobs is through recruitment agencies. They usually ask contactors to send them a CV to hand out to relevant clients.
Contractors can go directly to clients, but it is pretty rare to find long-term or regular contracting work this way.
Setting up your contractor business
As a contractor you will get a choice of what sort of business you work as. The choice is important because it can affect how much tax you pay – Fusion’s specialist contractor accountants can advise you on the best option.
Sole Trader: This is the simplest option for contractors since any profits are automatically yours since there is no separation between you and the business. You will need to file a Self-Assessment Tax Return each year and make National Insurance Contributions. (An accountant can help you with Self-Assessments). However, clients are less likely to work with contractors who are sole traders.
Partnership: This is similar to being a sole trader, but two or more people work together as one company.
Limited Company: A limited company allows contractors to be separate legal entities from their company, meaning they have a “limited” liability and are not personally liable for any financial difficulties faced by the company, etc.
Umbrella Company: Contractors can choose to be employees of an umbrella company, which deals with things like sending invoices and chasing payments. It makes things a lot simpler for contractors at the expense of having to pay higher taxes due to being an employee.
Setting up a limited company as a contractor
To set up a limited company, contractors need to notify HMRC and file a number of forms to Companies House which shows the company’s name and owners. With the help of an accountant the company formation process is quick and easy for any contractor.
Running your limited company as a contractor
As a contractor working as a limited company, there will be various ongoing tasks involved in the running of a business to do, such as sending invoices and dealing with bookkeeping. An accountant can help make bookkeeping easy, as well as filing annual tax returns and creating important financial documents.
How contractors working as limited companies save tax
Since a contractor working as a limited company is both an employee and an owner of the company, they are able to pay themselves in a combination of dividends and salary. Since contractors do not need to pay National Insurance Contributions on dividends you can save tax by getting the right balance between dividends and salary.
How IR35 rules affect contractors
IR35 regulations are in place to stop contractors being able to pay lower taxes when they are working in a way which makes them essentially employees of the company that hires them. Much of it comes down to how your contract is worded and whether an employee would usually be doing exactly the same job. A specialist contractor accountant can help ensure you are not caught out by IR35 regulations.
What happens if a contractor is caught out by IR35 rules?
If, as a contractor, you are caught working outside the IR35 rules, you will be considered as an employee of the client company that pays you so you will need to take all the money as a salary rather than being allowed to receive it as dividends. This is why contractors need to pay more tax if they work outside of IR35 rules.
All-inclusive accounting packages for contractors
Since contractors have extra things to worry about over other types of workers and businesses, namely IR35 regulations, it is important that you choose an accountant who specialises in advising contractors.
Get in touch with Fusion to ask about our free initial consultations so you can see for yourself if we are the right specialist contractor accountants for you.