The contracting way of life grants workers an enormous amount of independence and freedom, allowing them to pick and choose the projects they complete according to what works best for them and their commitments outside of work.
If you are or plan to become a contractor in the near future, it is likely you will have explored the possibility of launching your own limited company.
This allows you to reduce the amount of tax and National Insurance you are required to pay provided you meet certain conditions. So what are the things that you need to consider?
Depending on the nature of your clients and contracts, it is possible that you may not be able to operate as a limited company contractor as a result of the IR35 legislation.
This piece of legislation was created in an effort to prevent the avoidance of tax by those workers who would be ‘disguised employees’ rather than genuinely self-employed.
The decision to operate through a limited liability company hinges on HM Revenue and Customs’s (HMRC’s) definition of self-employed and although it does not publicly disclose this, it is likely that you will be considered to be self-employed if you are in control of when, where and how you complete a contract. If so, you will be outside IR35 and free to operate as a limited company contractor.
However, if a client dictates these working conditions, you will probably fall inside IR35 and should instead explore alternative options, such as operating as an umbrella contractor (find out more information here).
Another thing you should be aware of is the amount of administrative tasks that limited company contractors are required to carry out.
HMRC requires all workers operating in this manner to keep detailed, accurate accounts and unless you are a qualified accountant or engage the services of professional accountants, it can be extremely difficult and challenging to do bookkeeping, prepare accounts and calculate tax.
In addition, the taxman reserves the right to request to see all relevant documentation at any time in a five-year period, which is another reason you may want to seek the help available of accountancy services providers.
It is natural to feel daunted when you first realise the amount of administrative tasks that goes with operating as a limited company contractor, but seeking help from a qualified professional will not only make your life easier, it may also provide you with a long-term financial advantage.
As well as ensuring that you are compliant with all rules and regulations – thus avoiding potentially substantial fines – accountancy services providers can provide advice around will inform you of the level of salary you should take from the company as well as any financial reimbursements you are entitled to, but may not already be aware of.
Contracting provides workers with freedom, so the last thing you want is to find that all your spare time is taken up with endless amounts of paperwork. Hiring an accountant to handle your books will ensure you retain the independence that is very rarely available as a regular salaried worker.
With a professional taking care of your accounts, you will be free to concentrate on whatever you wish, whether that is a hobby outside of work, spending time with your family or simply completing additional contracts.