Hello – I have just taken voluntary redundancy after nearly 27 years working as an employee. I am now trying to figure out the best step for my future employment (employee, contract via Ltd Company or contract via Umbrella Company). I have read the PCG “Guide to Freelancing” (as advised by one of the threads) and also quite a bit of the info on Contractor UK. But I have some initial questions please that I’d be grateful for any experienced contractor’s opinions on:
Hello
1. Are most contracts for IT work that are sourced via an Agency likely to be “IR35 Compliant”? Or do most contractors tend to use a contract lawyer or perhaps their accountant to review and amend each new contract? I realise it’s the contractor’s responsibility to check, I just wondered what common practice is?
Your IR35 status will be dependent on your working practices and not just what's written in a contract so you will need to get an understanding of the legislation before you begin. Basically you will need to consider whether there will be mutuality of obligation, whether you will be under the supervision, direction and control of the client and whether you can provide a substitute. There are guides on the site that will help you.
2. I am guessing that usually the client or agency proposes a contract which the contractor can review & amend if necessary? I can’t imagine a big corporate allowing little me to propose a contract to them?
You are correct.
3. As an employee, the contractors I met at work tended to: have to work on site in our office under our direction, used our computers (for security) and had been interviewed and chosen for their specific personal attributes (hence we would not have been happy if they substituted themselves with another person). Yet from what I have read most contractors work via Ltd companies. Doesn’t IR35 hit most contractors? Or is my experience un-typical?
The contractors who you worked with would more than likely fall inside IR35. That doesn't mean however that they can't work through a Ltd Co - it just means that their salary must be via PAYE rather than divs.
4. Ideally I would like to be able to stop working & effectively retire in 18-24 months. Is it likely to be worth setting up (then closing down) a Limited Company? The PCG Guide says: “because of the admin involved, it is not worth setting up a limited company if you only plan to freelance for a few months.” But is 18 months worth it?
If you are on a good daily rate (£300 up) and your working practices put you outside IR35 then yes it would be worth it - otherwise an umbrella company would be a good option for you
5. Why would a person choose to contract via an umbrella company rather than work directly as an employee? The main reason I can see is that of course it allows you to take contracts (which I assume typically pay more for similar work than an employee would get). But is there something else I’m not seeing? Can you save tax for example?
If you work on an agency's books then they are your employer and therefore have all the corresponding employer responsibilities - these pass to the umbrella company which means that your rate should be significantly higher than if you work direct. Provided that the umbrella company operates an over-arching contract of employment and you intend to work on more than one assignment whilst in their employment you may also be entitled to claim tax relief on your expenses.
6. Whether I work via my own limited company or via an Umbrella company, I think it’s likely I will have to work away from my home office for a lot of the time. I have found that I can claim overnight accommodation & travel against profit of a limited company. What about via an Umbrella?
See answer to point 5
7. One thing I really can’t figure out is how running a Limited Company can save so much tax. I understand the concept of paying a small salary to minimise income tax (but the company still has to pay Employer’s NI). But then the dividend payment. I can see that tax payments to me as an individual are less on a dividend compared to income tax on salary. But the company will also be paying 20% corporation tax. As an example, say I would normally pay 40% income tax + 2% NI on earnings over £41,865. If I get paid instead by a dividend I read that I only pay 25% tax - but my company would also pay 20% corporation tax as well! So overall more tax (45%)!! I am clearly missing something, because Ltd companies are the most popular choice for contracting.
You wouldn't just pay 2% NI - on earnings up to £41,865 you pay 12%. Plus you will get dividend tax credit HM Revenue & Customs: Tax on UK dividends
8. If I operate via a Limited Company but use a recruitment agency to find work. Is it more common that my company would invoice the Agency or directly the Client?
Your Co would invoice the agency who, in turn, would invoice the client
9. Finally – is my best bet to arrange a meeting with a local Accountant (who specialises in Contracting) and seek advice on the best route for me? Do Accountants tend to offer such advice?
Thanks in advance.
Advice from experienced contractors please
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Originally Posted by Bantam
