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Understanding tax and limited companies: Contractors’ FAQs

Understanding tax requirements and regulations is a complicated business when you’re a contractor, but it doesn’t have to get in the way of your career aspirations.

We know it can be overwhelming and we understand that you have a lot of questions — Would I be better off operating as a limited company? Are the tax benefits worth it? Could I handle the admin work? Would it restrict me in future?

So to help you begin to get your head around it all we’ve noted down the queries which come up with our clients time and again and we hope you’ll find our answers helpful.

We’ve divided our guide into three sections:
• Getting set up
• Getting paid
• Up and running: admin, obstacles and the future

Getting set up

1. I’m thinking of setting up a limited company- how do I know if it’s right for me?
There are pros and cons to working through a limited company.
For example, you’ll be working in the most tax-efficient way, but the administrative side of things is more hands-on, which can be daunting for some.
As a limited company, your take home pay would be 75 – 80 per cent of your contract value —compared with just 60-65 per cent through an umbrella company — because you’ll make savings around things like National Insurance and the Flat Rate VAT Scheme.
The choice between the two is a very personal one, but generally, setting up a limited company is definitely worth considering if your contract is for three months or longer and you earn more than £25k.

2. What costs do I need to think about if I set up a limited company?
As a limited company you’ll need to consider how much you’ll be paying yourself, the amount of tax to set aside, as well as the cost of insurances.
We know you’re likely to have questions about this as well as what expenses you can claim.
Our experts at Taxup are more than happy to help, so do give us a call if you want to discuss your unique circumstances.

3. Is it true the new financial year is the best time to set my limited company?
It really makes no difference when you set up your company during the year.
But it is worth saying that it is better to do it before your contract start date so that you have everything ready to begin a couple of weeks before you start.

4. Is it easy to switch to a limited company?
The process of changing to work through a limited company from an umbrella firm can be completed in two easy stages:
• Form your limited company — this can be done online in a matter of minutes;
• Open a business bank account — as soon as your account is open you can start working through your limited company.

Getting paid

5. How long will it be before I can pay myself if I set up a limited company?
As soon as your business bank account is open you’ll be able to transfer funds into your personal account.

And the beauty of a limited company is that it’s yours – so you can pay yourself whenever you like!

6. Is there a tax-efficient way of paying myself?
Dividend payments can be an effective way of receiving your income because you don’t have to pay national insurance on them and you can pay them as often as you like.

7. Are take home pay calculators accurate?
When you work through a limited company there are many variables which affect your pay.
These make it extremely difficult to predict exactly how much you’ll take home.
However, by seeking advice from an expert with experience working with contractors like our staff at Taxup, you’ll be safe in the knowledge that you are in the best possible position.

8. What expenses can I claim as a contractor?
Business expenses include a wide variety of things including insurances, postage, travel, salaries and accountancy fees – basically, anything which is exclusively for business purposes.

Up and running: admin, obstacles and the future

9. Is there a lot of admin involved in keeping a limited company?
In a limited company you are responsible for the paperwork which involves things like sending invoices, calculating and recording expenses and paying the tax man.
But once you have got the hang things, these tasks take less than half an hour each month.

10. What insurance do contractors need?
As a contractor you’ll usually require two main types of insurance.
The first is professional indemnity insurance which protects your company financially from any claims made against you.
The second is public liability insurance which protects you against claims by third parties for injury or damage to themselves or their property.

11. What is IR35?
IR35 is Intermediaries legislation aimed at eliminating the avoidance if tax and National Insurance Contributions (NICs) through the use of intermediaries.
The law distinguishes between contractors and employees attempting to disguise themselves as contractors.

12. How could IR35 affect my limited company?
If your contract and working practices do not meet HMRC’s definition of ‘self-employed’ you will have to pay full tax and full National Insurance and as well as face reduced expenses.

13. Are there any benefits to having a limited company if I do not meet the HMRC definition of ‘self-employed’?
Financially, it could still be worth it.
While you would have to pay full tax and National Insurance you would still be able to claim five per cent of your turnover and travel and accommodation expenses too.
You can also save about £2,000 a year through the flat rate VAT scheme.

14. What happens to my company if I take up a permanent job?
You can close your company if you take on a permanent role, or you can put it on hold.
We know that this is a big decision for any contractor, but we are on hand to discuss your personal circumstances and advise you the best course of action if you would like.

We hope you’ve found our answers to these questions helpful but completely understand that you might appreciate some guidance which is more tailored to your particular circumstances.

Do get in touch if you’d like to discuss your options. We’d be only too happy to help.

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