Best Business Structure:
After deciding to make the move into the world of IT contracting, the first task for any aspiring contractor is to decide upon the best business structure to work under.
Clients hire contractors on a business-to-business basis, so there are several ways in which contracts are actually arranged:
- Direct Contracts – the contract is made between the client company and the contractors’ own limited company or Umbrella Company.
- 2. Via Agencies – one contract is made between the client company and the recruitment agency, and another between the recruitment agency and the contractors’ own limited company or Umbrella Company.
In this article, we look at the two key business structures used by contractors – the limited company and Umbrella Company.
If you set up your own limited company, you will become a company director. As one of almost 1.3 million companies registered in the UK, you will have a number of statutory and financial obligations; you will have to submit annual accounts to Companies House (the registrar of companies in the UK), run the company responsibly and meet your HMRC tax deadlines.
Fortunately, most of the legwork involved in running a company can be taken on by a specialist contractor accountant – NPUS Accountants ; although as a director you are responsible for meeting the company’s obligations.
One of the main benefits of contracting via a limited company is that it is the most tax-efficient way to operate. Unlike a permanent or umbrella employee, you pay yourself in the form of a basic salary (typically low), and the remainder is drawn down in the form of dividends. Dividends are not subject to National Insurance Contributions, which results in a significant tax saving.(Subject to changes to tax on Dividend)
As a company director, you also have a great deal of flexibility over when to take income out of the company, which has further tax planning benefits, and you can also benefit by transferring some shares to your spouse (if appropriate).
Limited companies pay Corporation Tax on their annual profits (at a rate of 20%), and VAT is added to all your invoices and repaid to HMRC each quarter, after allowing for any VAT you may have reclaimed on company purchases. Further benefits of Flat rate VAT scheme which you can take advantage of.
The number of umbrella company schemes operating in the UK has grown rapidly over the past decade.
If you join an umbrella company, you will become an ’employee’ of the scheme. The client pays the scheme when you have submitted a weekly or monthly invoice, and you will receive a salary after deductions for tax, National Insurance, expenses, the umbrella fee, and any other pre-agreed costs.
It is not as tax efficient a business structure to use as the limited company route, however it does represent a ‘hassle free’ way to contract, which may appeal to contractors who are testing the water, short-term contractors, and those who do not want to take on any form of administration.
Also new legislation from April 2016 further restricts Subsistence and Travel expenses.
Should you have any further questions please do not hesitate contact us on 020 346 88788 or email: firstname.lastname@example.org.