Firstly, how much you earn as a contractor depends on how you decide to operate, either as a limited or an umbrella company or other type such as PAYE through an agency. If you work through a limited company then whether you are inside or outside of IR35 will also have an impact as it affects some of the expenses you can claim to offset against your tax. Limited company contractors can take home around 75-80% of their contract value when compared to umbrella company contractors who are entitled to around 60-65% of their take home pay.
Working through an umbrella company and going through an agencies PAYE are now more similar than ever since the ability to claim travel and subsistence was removed for umbrella contractors who operate under supervision, direction and control. For both options you operate and are taxed as an employee and claim any eligible expenses at the end of the year.
The take home pay is higher through a limited company because there are tax efficiencies available around the expenses you can offset. The take home pay further varies depending on which industry you are working in, the company you work for and your skill set.
Both options have their advantages. However what’s best for you will depend upon your personal circumstances. For instance, it would be better to work through a limited company if your income is more than £25,000 each year or if your contract lasts more than 3 months.
However, running a limited company will bring in complex paperwork, legal administrative duties and adherence to strict government deadlines. With a limited company you’d have to ensure that you comply with administrative and financial deadlines demanded by both Companies House and HMRC.
This might seem a bit of a bother at first but despite these problems; working through your own limited company would put you in an advantageous position in the longer run. Contractors working through limited companies tend to increase the amount they take home, get better opportunities to plan taxes than through a PAYE umbrella, can claim back a wider range of expenses and even have access to a VAT scheme known as the flat rate scheme.
Contrary to popular belief, running a limited company is easy and with the assistance of a good accountant, it is the most tax efficient way of operating. If you have decided to make the switch and take control of your company affairs, look no further: Bradleys Contractors can help. The transition process is easy and quick.
To learn more about this mode of employment, please click here.
Switching from umbrella to limited is quick and simple. All you need to do is inform the umbrella company that you don’t need their services anymore, and then form a limited company. This doesn’t take more than 5 minutes and is a relatively inexpensive.
As soon as you’ve formed the company you can stop working through the umbrella company and start trading via a limited company. Things can get a bit complicated if you decide to switch mid-contract or if the terms and conditions of your umbrella company demand a notice period so you need to be aware of that.
We advise you to discuss this with us before switching business structures as there might be a few considerations you’d need to make which we could advise you on.
When you are self-employed, you will incur both business and personal expenses. We recommend that you should operate a business bank account for transactions you make on behalf of the business as it is easier to claim expenses.
The following expenses can easily be claimed if your contract is not caught by IR35:
In case your contract is caught by IR35 then you can claim only the following expenses:
If you own a limited company or are thinking of starting one, you should be aware of IR35 legislation. We agree its details are intricate and confusing and can cause you a lot of undue worry. This is the reason why we insist you read this section on our site properly to understand whether or not your contract falls “inside” or “outside” IR35.
Every contract you work under should be assessed against the IR35 legislation. There are 10 key factors to evaluate before determining whether you are operating outside or inside IR35 and assessing your IR35 status is important:
After assessment, if the contractor appears to be controlled or managed in any way, it means they fall inside the IR35 legislation and have to pay income tax and National Insurance Contributions (NICs) on the company’s total income.
If a contractor has the same benefits, responsibilities and control as a permanent employee they are more likely to be caught inside IR35. When IR35 applies, the earnings for the engagement of the intermediary will be in the form of “Deemed Payment”, also called the “Deemed Employment Payment” as they are ‘deemed’ to be the income of the worker.
Deemed payment is usually paid out on 5 April at the end of each tax year. However, it can be paid out on a monthly basis as well provided the contractors file their payroll every month. To check whether or not you need to work out your deemed employment payment, please follow the steps given below:
Step 1 – Calculate how much your company received in a tax year from engagements under IR35 (take account of all payments and benefits).
Step 2 – Calculate your employment income that you received from your company (this is the amount on which income tax and NI deductions were made).
If the amount in step 1 is more than the amount in step 2, you will need to calculate the deemed employment payment.
However, if the figure in step 1 is equal to or less than the figure in step 2 you do not require to calculate deemed payment as there is no additional amount on which tax and NI have to be paid.
Here’s the basic formula to calculate deemed payment:
The remaining total is deemed payment.
Any limited company can register for VAT, even if the turnover of the company is not expected to meet the mandatory threshold of £83,000. When a company’s turnover reaches this threshold, you are legally obliged to register for VAT.
You have the option of operating your tax returns via any of the three:
To be eligible for this scheme, your VAT taxable turnover per annum must be £1.35 million or less. Under this scheme, you can pay VAT on your sales when your customers pay you and reclaim VAT on your purchases when you have paid your supplier.
Under this scheme, you can pay a fixed rate of VAT to HMRC and keep the difference between what you charge your customers and what you pay to HMRC. To join the flat rate scheme, your annual VAT turnover must be less than £150,000.
If you opt for this option, you can make VAT payments in advance based on your last tax return. This scheme will not suit businesses which regularly reclaim VAT because you’ll only be able to get one refund a year. You can join this scheme if your estimated VAT taxable turnover per annum is £1.35 million or less.