Trading options:
Before the introduction of IR35 the vast majority of contractors worked through their own Private Limited Company. Since the introduction of IR35 the tax advantages have been eroded and may have been removed totally. This depends on whether you fall within new IR35 rules or not. As a general rule, if you fall outside IR35 rules then you have free choice of which trading style is right for you. However, the new breed of Managed Service Companies such as Maxim Finance can either set up and run your Private Limited Company for you, or allow you to operate under the Managed Service Option (Umbrella).
Your options are:
- Agency PAYE (probably the least tax efficient option)
- Your own Private Limited Company
- Managed Service Company (Umbrella)
Agency PAYE:
Some agencies act as your employer processing you through their own payroll service. This may be the least tax efficient service available to a contractor as you pay full Tax and NI contributions on all your earnings. Also generally speaking this model does not include business expense recovery which normally reduces your Tax and NI liabilities.
Your own Private Limited Company:
Company set-up can cost from around £100 using either an Accountant or one of the many Company suppliers who advertise in trade press. Alternatively, you can apply for a Private Limited Company direct from Companies House, which is a cheaper option although the process does take longer and requires you to take on the administration burden. Some Accountants will set up your company for free when you sign up as a client.
Once you have formed your Private Limited Company, you will need to appoint a company secretary, which fulfils a legal requirement to record company meetings and perform administrative duties. In practice, this role is minimal and should not take up much time during the company year. Many contractors appoint their partner, or a parent. You will then be responsible for issuing invoices to your client/agency, running your payroll, issuing dividends, registering and accounting for VAT, and various other tasks. You would be well advised to appoint an Accountant to perform some, if not all the following duties on your behalf:
- Invoicing
- Payroll administration
- Processing VAT, PAYE / NI Contributions to the Inland Revenue
- Preparation of Year End Accounts
- Personal Taxation - completing your self assessment forms
- Completion of VAT returns
- Completion of P11D, P35, P45 & P60 and other forms on your behalf
- Insurance Provision (i.e. Public Liability, Professional Indemnity)
- Tax Planning Advice (e.g. Dividend Planning)
Typically, you will expect to pay around £130 - £160 per month for a reputable firm. Ensure you have a written schedule/term of reference. In addition we recommend you appoint a company Solicitor even if you do not need one right away.
Managed Service Companies (Umbrella):
An Umbrella Company provides a ready-made invoicing vehicle for contractors while removing the administrative burden normally associated with contracting in the form of a Private Limited Company. The Umbrella Company normally issues invoices on the contractors behalf, collects payments from clients/agencies, calculates expense recovery, and Tax/NI liabilities (although some Umbrella Companies charge extra for this service but not Maxim Finance). Additional benefits, such as sick pay, holiday pay and discounts on financial products and free advice, are often included in their services. This kind of service attracts a small premium and charges are usually between 3% or 4% rising to around 6% gross invoiced income, to reflect the level of benefits provided.
There are complex variations of Managed Service Companies called Composite Companies, however this choice of trading style is as yet unproven and leaves the individual at significant risk from the Inland Revenue.
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