Thinking of becoming a contractor?
If you’re thinking about becoming a contractor, there are various factors to consider before you decide.
Work/Life Balance – One of the key advantages of being a contractor is that you have the freedom and flexibility to choose both your projects and your working hours. There’s also a risk, however, that long hours are required to meet client deadlines so you need to weigh up whether this is viable with any other commitments you have, and whether you’re willing to make this sacrifice.
IR35 Compliance – IR35 is a set of tax rules designed to prevent disguised employment and stop tax avoidance by determining whether you are self-employed or considered an employee for tax purposes. It’s important for contractors to be aware of IR35 regulations to ensure compliance and avoid any penalties from HMRC.
Skills and Marketability – You should consider the experience and skills that you can offer in your sector as it’s important that you find relevant work and deliver a high quality service for your clients. Your reputation in your industry is also important as is whether you have a good network of contacts to source work from to ensure that your income is consistent. It’s important to consider the competition in your industry too, as well as any USPs you can offer.
Financial Planning & Benefits – Contractors are responsible for managing their own finances including expenses, invoicing, taxes and compliance. It’s vital therefore to have a sound financial plan in place with the right support from a contractor accountant. Contractors don’t receive the same benefits as conventional employees such as sickness and holiday pay. Contractor insurance can mitigate these risks if, for example, you were unable to work through illness or injury.
Company Structure
Your first step to becoming a contractor will be to establish a business through which you can sell your skills to get paid. This means choosing an operating structure. There are three common operating structures typically used by contractors – limited company, sole trader or umbrella company.
Limited Company – A limited company is owned by shareholders with day to day operations being managed by directors. If you contract through a limited company, you will usually be the sole shareholder and director.
A limited company is a separate legal entity so it provides more protection for your personal assets through limited liability. It can also offer tax advantages such as the ability to structure remuneration through a combination of dividends and salary. You’ll need to incorporate your company with Companies House, appoint directors and shareholders, and file annual accounts and tax returns. The majority of contractors operate through a limited company.
This structure allows control over financial affairs and requires more management than working through an umbrella company or as a sole trader due to more regulation and scrutiny from HMRC.
Sole Trader – Operating as a sole trader means you are self-employed and have personal ownership of your business rather than it being a separate legal entity. This means you’re responsible for its debts which can put your personal assets such as your home and investments at risk. It is a relatively low cost and simple operating structure but doesn’t offer the same tax-efficiencies as a limited company structure.
Umbrella Company – An umbrella company serves as an employer for contractors and takes care of admin tasks including tax deductions, payroll and invoicing. An umbrella company offers a relatively low risk and simple option for contractors that don’t want the administrative burden of running their own business. It is, however, generally less tax-efficient than operating as a limited company or sole trader.
Operating Through a Limited Company
The majority of contractors operate through a limited company. If you intend to take this route, the first step is to form your limited company. You’ll then need to choose a Shareholder and a Director – they can be the same person or different people.
Shareholder – A Shareholder owns the company either in part or whole. The percentage they own is represented by the number of shares they hold in the company.
Director – A Director will manage the day-to-day running of the business and they will be legally responsible for submitting the necessary financial paperwork.
Choose your Registered Office
When forming your limited company, you will need to decide on a Registered Office address. Official documents will be sent to this address such as those from HMRC.
You can register your own address, your accountant’s, or sign up for a registered office service.
Some contractors decide to use an address other than their own as this information will be publicly displayed on Companies House. By doing this, it draws a line between your work life and personal life.
Choosing a registered office address can also be beneficial if your rental agreement doesn’t allow you to use the landlord’s address as a registered office.
If you decide to use your personal address, but then subsequently decide against this, your personal address will already be in the public domain.
If you use the address of your accountancy firm, this will mean that your accountant will have instant access to your financial documents. This will allow your financial affairs to be dealt with promptly, saving you time and money, rather than posting them separately to your accountant or scanning and emailing them over.
An external registered office service can be used for an additional cost.
Open a Business Bank Account
When you contract through a limited company, your business is a separate legal entity to you. Therefore you’re legally required to open a separate business bank account into which you, as the director, will be paid. If you operate as a sole trader a business bank account isn’t mandatory, but there are many advantages of having one.
A dedicated business bank account keeps your business and personal finances separate which makes it much easier to monitor your cash flow, track expenses and manage your taxes. You can integrate your business bank account with accounting software, such as FreeAgent, which can significantly increase efficiency. A business bank account increases credibility and also opens up access to business loans and credit that may not be available through your personal bank account.
Gorilla Accounting has partnered with Mettle, the 100% free business bank account by NatWest, that gives people the financial confidence to turn their passion into opportunity. Mettle is built for contractors, freelancers and small business owners and you can apply for an account in minutes here.
Take out Business Insurance
With protection in place from the right business insurance, you can be confident that your company can handle any unforeseen circumstances.
There are three common insurance policies taken out by contractors:
- Professional Indemnity: Covers legal defence costs and any damages awarded against you if a client makes a claim against you due to errors made in your work through omissions, errors or professional negligence in the services provided by your company.
- Public Liability: Covers legal defence costs and compensation if a third party (either a client or a member of the public) suffers an injury or damage to property as a result of your company’s actions.
- Employer’s Liability: Provides cover if an employee of your limited company makes a compensation claim regarding illness, injury or accidental death sustained as a result of being employed by your business. This cover is usually required as part of a contract and protects your company against any employees making a claim against you.
Other common types of contractor insurance include Personal Accident, where you’re paid a lump sum should you suffer an injury due to an accident and Contractor Sickness Cover which would pay you a monthly benefit if you were unable to work through sickness, disease or an injury.
Gorilla Accounting has partnered with contractor insurance experts Qdos to provide the best contractor insurance that makes protecting yourself and your company simple. Click here to get a quote from Qdos today.
Appoint a Specialist Contractor Accountant
If you appoint a contractor accountant, they can take care of forming your limited company and they will handle your tax and financial affairs as well as offering support and advice including how to maximise your tax efficiency to increase your take home pay.
Gorilla Accounting are specialist contractor accountants. As part of our all-inclusive limited company contractor accounting package, for just £110 +VAT per month, we offer the following:
- FreeAgent MTD-compliant bookkeeping and accounting software free to all Gorilla clients
- Quarterly review of your bookkeeping data
- Tax planning advice to help maximise tax efficiency
- Preparation & Submission of Financial Statements
- Preparation & Submission of Corporation Tax Return
- Preparation & Submission of quarterly VAT Returns
- Preparation & Submission of Payroll (for up to 2 employees)
- Preparation & Submission of P11d
- Preparation of one Self-Assessment Tax Return
- Standard employment status references
- Assistance with HMRC records checks
- Reminder services for all deadlines and payments
- Preparation of Companies House Confirmation Statements
- Assistance with share issues or transfers and changes of particulars
- Dividend and board minute documentation
- Ongoing tax payment reminders
- Same day response service with our Client Service Guarantee
Additional Charges:
- Company Formation service (£50 + VAT)
- Registered Office address service (£10 + VAT per month)
- Self-Assessment Tax Return for additional Shareholders/Directors (£125 + VAT) for a basic return. Additional pages come at an additional cost
Gorilla Accounting is a forward-thinking, technology-focused solution to your contractor accountancy needs. Our service is specifically designed for contractors and we have decades of experience across many industry sectors. If you are looking for advice on becoming a contractor or want to appoint a contractor accountant, please give our team a call on 0330 107 9677 or request a call back here.
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