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If you have taken the decision to become a contractor, you may be overwhelmed by the sheer number of choices when it comes to how you should organise your business. Whilst it can be invaluable to take advice from people who have experience of running their own business, financial arrangements can vary hugely from one sector to the next or depending on your income and tax arrangements.
When making your decision it is always recommended that you consult an expert so your decision is as well-informed as possible. At Nixon Williams, we’re here to make sure you’re as well-informed as possible. We’ve outlined all of the options when it comes to setting up your business so you can be confident about what each entails and if it’s the right choice for you.
A limited company is a separate entity which is established for the sole purpose of running your business.The company will appoint a director at incorporation (you), and as a director, you will be responsible for paying taxes and keeping accounts up to date. All earnings from your limited company will sit in a separate bank account and these profits can be withdrawn by means of dividends.
Trading through a limited company means that it is the company, not the individual who can enter into contracts and take responsibility of its finances.
For those who want to enjoy as much of their income as they can, trading through a limited company that you set up and run yourself is usually the most lucrative way to do business. As the director of a limited company, you can benefit from a range of tax efficiencies which are not available to those who are operating as sole traders or through other outfits such as umbrella companies. You can also choose to draw dividends as well as a salary from a limited company, and because dividends do not attract National Insurance, this can help you to save money on your annual bills.
It is also a good way to minimise the risks to your personal assets as you and your company will be considered as separate entities, which means that you will not be personally liable for business debts, even if you are the sole shareholder.
As a limited company director, you will have the option to organise your limited company and manage your expenses in the most effective way. Your dedicated accountant will be aware of all the potential savings available to you, will help you to establish whether you would be better of becoming VAT registered or using the Flat Rate VAT Scheme and help you work as tax-efficiently as possible.
An umbrella company is an entity which acts as an employer for a contractor. An umbrella will treat you as an employee and deduct tax at source through the PAYE system, but they will also pay both employees and employers’ National Insurance on your behalf. As an umbrella employee you will also be required to submit a timesheet outlining your working hours in order for you to be paid a salary.
You will also be entitled to a range of employee benefits (this will vary depending on your agency) such as annual leave, sick pay and maternity/paternity leave.
For many new contractors, an umbrella company can offer the perfect first step into the world of self-employment. Working for an agency on a shorter-term project means you will have a taste of freedom, coupled with the security of a regular paycheque. If you don’t expect your take-home pay to be great or you’re only looking to go self-employed for a short period of time, working under an umbrella company could be the best choice.
If you work as a sole trader, you will need to register as self-employed and will be required to submit your earnings via a self-assessment tax return providing you are not taxed under PAYE. As the exclusive owner of the business, you will be entitled to all earnings but you will also be solely responsible for any debts that may be incurred. A sole trader works in much the same way as a limited company, the main differences being your liability and the work you will need to complete.
When you are just starting out and establishing yourself in business, being a sole trader can be the simplest and easiest way to work. You can register with HM Revenue and Customs (HMRC) for free using their online form or over the phone, and they will provide you with all the information you need to get started. You will be responsible for completing an annual self-assessment tax return and paying your own tax bill, but the process is relatively simple and the form will calculate how much tax you owe. You will also have to pay your own National Insurance at the appropriate rate.
This kind of scheme constitutes tax avoidance and operating under such could leave you vulnerable to penalties.
If you live and run a business in the UK, there must be a very specific set of circumstances which would allow you to forgo paying taxes and any scheme which involves you moving money out of the country should be met with caution.
There are schemes which utilise offshore accounts and promise investors the chance to take home a relatively high proportion of their income. Those who sell these schemes often promise to reduce your tax bill by paying a low salary and offering the rest as a ‘loan’. Some will claim to be HMRC approved tax vehicles or state that they are ‘legally backed’ in order to seem legitimate, but using such a scheme would be unadvised by most.
Nixon Williams does not offer any schemes and would remind our self-employed clients to remain wary of such arrangements. Since legislation updates in 2011, the government has taken a stance to make the benefits of these companies useless in a bid to deflect any attractiveness.
A partnership is an arrangement whereby two sole traders choose to work together. The sole traders will submit their own self-assessment tax returns and pay National Insurance as individuals. However, the business will be treated as one entity when it comes to VAT registration.
Company partnerships can be a good way of working alongside someone to build a business whilst still having your financial independence. However, you should bear in mind that each partner is considered jointly liable for any debts which the business may incur. This means that if one partner can’t pay their share of the debts, it will be the responsibility of the other to make up the amount.
A Limited Liability Partnership (LLP) works as a hybrid between a normal partnership and a limited company. Under this arrangement, business owners can enjoy the freedom and flexibility of a partnership with the security of having a company in place. Each partner will become a member who is self-employed and remunerated in the way of ‘drawings’. These profits do not affect the level of profits declared for tax purposes.
An LLP is an alternative corporate business vehicle, giving the benefits of limited liability but allowing its members the flexibility of organising their internal structure as a traditional partnership. If you and a partner are looking for flexibility but want to keep your business modest and secure, a limited liability could be a good compromise.
Whether you decide to go limited, contract under an umbrella or go solo, we’ll be here to offer support and knowledge along every step of the way.
We assign all of our clients their own dedicated, knowledgeable accountant and provide a direct line so you can contact them whenever you need. Our accountants are all specialists in the contractor market and ensure that they always keep up-to-date with any changes to tax legislation to ensure that they provide only the most current advice.