Would I be better off as self-employed?

The difference in tax and national insurance paid by individuals working through their own Limited company and the self-employed has almost disappeared.  If you are contracting you will have to either work through a limited company or via an umbrella or on payroll at the agency.  If you are freelancing the choice is more open.  You may wish to start as self-employed and transfer your business to a limited company in the future.

Remember a limited company does what it says, if a client sues you a “Ltd” or “Limited” company limits your liability to the money (and other assets) in the company.  You cannot lose your personal assets such as a car or house (unless you have given them as security).  If you trade as self-employed you and the business are one and the same and if anything goes wrong and you do not have enough insurance the claim will be against you personally.

What is the difference between a director, shareholder and worker?

See the video explanation section for a quick video on the differences.

Should I own the company with my spouse?

This would depend on your personal situation; please give us a ring and we can advise you.

Do I need to register for VAT?

If you expect your income to exceed the VAT registration threshold then you will need to register for VAT.  Until your income gets close to the registration threshold you have the option of registering voluntarily.  Many contractors register for VAT at the outset and also apply for the flat rate scheme, as the paperwork can be set up with your work agency from the beginning.

How does the VAT flat rate scheme work?

The VAT flat rate scheme is designed to make VAT accounting easier for small businesses.  Each type of business has a different flat rate percentage and this should reflect the amount and the types of purchases the business makes.  For example a hairdresser will have many more purchases than an IT contractor and the flat rate for a hairdresser is 11% and the flat rate for an IT contractor is 14.5%.   The scheme works as follows:

You raise an invoice to your client for £1,000 plus VAT at 20% = £1,200 in total.  Your client pays this amount.
When you complete your VAT return you multiply your total sales including VAT, so £1,200 in this example by your business flat rate percentage so our IT consultant would multiply £1,200 by 14.5% and pay £174 to HMRC on the quarterly VAT return.

Why do I need a PAYE/payroll scheme?

In order to pay the director an amount that is high enough to qualify as a contribution year towards state pension (and also for statutory maternity pay “SMP”) you need to register a payroll scheme and comply with the monthly RTI reporting regime. If you choose not to have a salary, perhaps because you already receive a pension, then you will not need to register a scheme.
Most limited company contractors should operate a payroll and this is why it is included as standard in our packages.

What records do I need to keep?

Your company will need to keep records that support the transactions that are recorded in its accounts.  You should keep a pdf or printed copy of all invoices issued to clients (or agencies) or keep the pdfs that the agency produces on your behalf.

You will also need to keep receipts for your purchases.  Sometimes for small items collecting a receipt can slip your mind.  It is helpful if you pay for items using your company debit (or credit) card as the company will have an automatic record of the expense and these days the narrative on bank statements is quite helpful, so an expense with “Subway” or “Pret-a-manger” will be subsistence and a debit to “Southern Rail” will be for travel.

Remember if HMRC select your company for review you will need to have evidence to support the expenses put through in your accounts.  If you are not sure if an expense can be claimed by the company then always collect a receipt and then your accountant can review it and decide how to treat the item.

It is also helpful to have a running total of income and expenses so you can calculate the company tax and the amount you can take out as dividends see “How will I take money out of the company” for more information on this.

When will my company have to pay taxes?

Contractor limited companies have to pay their corporation tax nine months and one day after the end of the accounting period.

What is an accounting period?

When a company is incorporated at Companies House the accounting period is automatically set to the last day of the month 12 months after incorporation.  So if your company was set up in May 2017 the first accounting period would run from the date the company was set up to the 31 May 2018.

When do I have to prepare accounts?

Accounts are prepared for an accounting period and have to be prepared in accordance with accounting standards.  The accounts must be filed with Company’s House nine months after the end of the accounting period.

What are the key dates for Contractor company reporting?

Nine months after the accounting period ends – accounts filed with Companies House

Nine months and one day after the accounting period ends – corporation tax payment to HMRC

On the anniversary of the incorporation date – the confirmation statement, with information on the shareholders plus the filing fee of £13 filed with Companies House

Twelve months after the accounting period ends – the company tax return, plus accounts and calculation filed with HMRC

Every month – the monthly payroll reporting to HMRC

Every quarter – the VAT return to HMRC

31 January – director’s self-assessment tax return and payment of any tax due to HMRC

31 May – annual P60, summary of salary information

6 July – any benefits-in-kind given to the director or spouse (such as a company loan) to be reported to HMRC, the national insurance to be paid by 22 July.

What expenses can I claim?

You can claim all business expenses, so accountant’s fees, any business stationery, business cards, website costs, professional subscriptions, professional indemnity insurance fees, annual confirmation statement fee, travel and subsistence costs (but check if you are at the same office for 24 months) and your salary.  With a business to run you may also include the costs of tablets, laptops and printers.

If you need to attend courses these and any travel, accommodation and subsistence costs can be paid for by the company.

You can also have a staff party or parties up to a value of £150 per head.

How much will I need to put aside for company taxes?

Company’s pay tax on their profits, that is, income less expenses.  You will need to track the income you receive by keeping a log of all the invoices issued in the year (regardless of whether you issue the invoice yourself to your client or whether your agency does it on your behalf).

You will also need to track your business expenses by logging all the expenses you pay for using your company account plus any items you pay for using your own personal money.

Company tax is paid at 20% of the income less expenses.

If that sounds too complicated then for most contractors saving between 16% and 18% of each invoice (before VAT) should be about right.  You would have time to save any extra due as companies’ pay their tax 9 months after the end of their accounting period.

How much do I need to set aside for personal (income) taxes?

As a director of your own limited company you will have to prepare a self assessment tax return.  Your income for income tax will be your salary and the dividends you have taken from your Limited company plus any other income you have unrelated to contracting (for example, buy-to-let income, other bank interest and other dividend income from investments).

If you are a basic rate tax payer you should set aside 20% of any net property income and 7.5% of any dividend income after the first £5,000.  This should give you sufficient money to pay your taxes but you will still need to complete the tax return and file it by 31 January.

If you are a higher rate tax payer you will need to set aside 32.5% of the dividend income where your total income exceeds the personal allowance plus the basic rate band.

Please remember these amounts are approximate, just so you have sufficient money set aside for your tax bill; you will need to do a formal tax return and calculation to work out exactly what is due.

What about pensions?

Saving for the future is a very sensible step to take.  You can set up a personal pension scheme or a self-invested pension plan (SIPP).  Your limited company can make contributions to the pension scheme and this payment will be an expense for the company and reduce the company tax you pay.  This is the most efficient way of making a contribution.

The salary you should take from the limited company should be high enough to count as a qualifying year towards state pension; who knows what it will be worth when you retire but you should make sure you have a full national insurance contribution record.

If you don’t know what your contribution record is then you can request a letter from the government at https://www.gov.uk/check-national-insurance-record

What about auto enrolment?

If you are the sole director of your own Limited company and you have no other employees then auto enrolment will not apply to you.

If you and your spouse are both on the payroll then auto enrolment may apply and you should seek guidance from the pensions regulator or from your accountant.

How will I take money out of the company?

As a shareholder and director of your company you are able to take money out of the company as a low salary and dividends. The low salary is paid to you as the director and is high enough to give you a qualifying year towards state pension but low enough that no (or minimal) national insurance or income is due.

The dividends are paid to you as a shareholder of the company and are paid out of the profits of the company.  The Clearways Accountants’ accounting spreadsheet will help you to calculate the amount you can take as dividends at any moment in time.

Do I have to complete a self assessment income tax return?

As a director of your own limited company you must register for self assessment and complete a tax return by 31 January each year.  If you are not a director then providing there are no other reasons for you to register then you do not need to do so.  Use the online checker to find out if you need to register https://www.gov.uk/check-if-you-need-a-tax-return