This is my complete guide to contracting in the UK. When you first take the step to go contracting through your own company there may be many questions that you would like the answers to. In fact, there is so much to consider, it can feel overwhelming, especially if this is the first time that you have set up by yourself.
This guide aims to give you an overall insight into what to consider in terms of running your own limited company. When you do this, you can look to be tax efficient as you go along. I have a list of tax tips to help you and details on what you can claim as business expenses as well as how you can maximise your basic rate tax band in terms of drawing income from your company.
There are also differences to consider depending on whether you will be contracting or freelancing.
Section 1 -guide to contracting -setting up your own company and related tasks
There are a number of ways you can do this. Most contractors will let their accountant perform this task, however it is not too difficult to do this yourself. Forming your own company follows a certain process and there may be a cost to this too.
You will need to decide on official address for your company’s registered office. This is the legal address of your company. There are a number of choices here and I would recommend that it is good to get the official address right from the outset.
Company year end
Every company has to have a financial year end. You can pick this from the outset when setting up your company. However, if you do not set the company year end, it will automatically default to the end of the month in the following year after you set the company up. Therefore, if you set your company up in August 2021 and did not set this, the year end would auto default to 31 August 2022.
Directors are the people that run and control a company. You will need to consider, besides appointing yourself as a director, if you would like to appoint any other directors.
Shareholders are the people in a company that receive a share of the company’s profits by way of dividends. They are also entitled to a share of the company’s final distribution of funds when it eventually closes down. You will also need to consider who the shareholders in your company are to be. If you will be the one generating the work from your company you will be a shareholder. However, you could also issue shares to your partner or someone else who is involved with your company.
Generally, a contractor or small business owner with their own company will be both the director and shareholder.
UK companies are required to keep and maintain statutory records. These show who the company officials and shareholders are amongst other info. Your accountant will usually look after these for you.
Appointing an accountant
As part of my guide to contracting, I would recommend that you look for an accountant from the outset. When you appoint an accountant, it is best to do your research as there are many out there, to choose from. If you are a contractor it would be wise to pick a good accountant who specialises in the contracting industry and has knowledge on this sector. There are certain areas that a normal high street accountant may not be aware of such as IR35 and rules around travelling expenses. This page details the accountancy services that I provide.
Opening a company bank account
Once your company is set up, you can then open a company bank account. There are certain considerations here and getting a good bank from the outset can save you hassles further down the line. Most high street banks offer free banking for the first year and then the fee is around £6 per month. The deals out there are always changing. I will mention further in this article about keeping your company’s records and I recommend FreeAgent here. Most banks work well with FreeAgent, however, both Natwest and RBS will actually pay the FreeAgent licence fees if you sign up with them from the outset.
As a contractor or small business owner you will need to consider business insurance. Ordinarily, your contact you may be required to take out professional indemnity insurance. However, you should consider if you need any other insurances for your business.
Choosing a book-keeping / accounting system
Maintaining your business records as you go along is key and if you are organised this will make it easier for your accountant. This will also help to keep your accountancy fees at a respectable level. FreeAgent is an excellent choice for an online accounting system if you are a contractor or small business owner.
It is also good from the outset, to know how you should maintain your business records and how long you need to keep these for.
Section 2 -guide to contracting -company taxes
Set up a business tax account with HM Revenue & Customs
In my guide to contracting, I would advise setting up a business tax account from the outset as you will have an overview of your company’s taxes as you go forward. This will also make it much easier and quicker for you to add your accountant as an agent. I would recommend that you add the services for 1) VAT (see below regarding VAT registration), 2) Corporation Tax and 3) PAYE / NIC.
VAT registration is something to consider when you set up your own company. The rule for VAT is that if you know your trading income will be over £85,000, you will need to register. However, you can also register voluntarily. You will also need to consider if the normal scheme or VAT Flat Rate scheme is the best option -contractors are usually better off under the normal scheme. Once registered (if you are under the normal scheme), you will be able to reclaim VAT on your costs. Being VAT registered effectively means that your VAT inclusive costs will actually cost you one sixth less. Once an online VAT registration application is submitted, it takes two days to receive your VAT number and four days to have access to your VAT certificate.
All businesses pay Corporation Tax on their company profits. This is payable once per year nine months and one day after your company’s year end.
PAYE and National Insurance is payable on company salaries. This is ordinarily payable quarterly by the 19th of the month after the end of each calendar quarter.
Section 3 -guide to contracting -trading as a company
Invoicing your client
Whether you are going to invoice your client on a weekly or monthly basis, as part of my guide to contracting, please note it is important that if you are sending invoices these contain the correct details. If you are working through an agency for your client the agency may self bill and will send you a remittance advice. However, if you will be sending invoices you need to know how to do this and secondly, if you will be recharging your expenses it is important that you get this right too.
Claiming for expenses through your business
When it comes to doing this, contractors and business owners can miss claiming for certain expenses. If you do claim for all of your expenses, you can a) save tax on these and b) any that you have paid for yourself can be reclaimed from your business. When you start up for the first time there will be both pre trading expenses and business expenses that you incur as you move forward. With regards to reclaiming the expenses that you pay for yourself, best practice is to reimburse these on a monthly basis.
Once you start your company will you be doing any work from home? If the answer is yes, it is also good to know from the outset how to create your home office and what you can claim for use of your home for business.
Section 4 -guide to contracting -extracting income from your business
Extracting income when you go contracting
In my guide to contracting we now turn to drawing income from your company. You can draw a salary, dividends and reimburse your expenses.
Paying salaries when you go contracting
When you start working you will think about paying yourself a salary just like you would receive if you are employed by an employer. You could take a low salary, middle level salary or a high salary depending on your circumstances.
If your spouse or partner will assist you in running your company you can also consider paying them a salary for their time. The type of work that they could do could be admin type work. This could include opening mail, answering the phone, emails, invoicing, business website type work. Their salary should be at a commercial rate for the time that they spend working for your company.
Paying yourself dividends
When a company is set up, there are a number of shares issued at the outset. Ordinarily, you would be the sole shareholder. However, you may choose to issue some shares to another individual such as your spouse when the company is set up. Best practice is to pay dividends on a monthly or quarterly basis. You can do so by making a transfer from the company account to your personal or joint account.
There are many aspects to paying dividends. These include when should I pay them, the timing of paying them, how much can I pay, the dividend allowance and illegal dividends.
You can also consider setting up a contractor pension. This enables you to extract extra income from your company and benefit you personally in the future.
Section 5 -guide to contracting -official filing
As part of my guide to contracting, we now turn to official company and personal filing requirements. When you are a director running your own company there will be certain filing requirement every year. The main requirements are:
Other filing requirements
Besides the above, you or your accountant may also need to file VAT returns (quarterly), PAYE/NIC RTI (Real Time Information) returns (usually quarterly). You will also need to file a P11D return once per year if your company provides you with benefits in kind such as a company car or other benefits.
I detail in my guide to contracting the things you need to consider when you run your own company. It is highly recommended to be organised from the outset and this will stand you in good stead going forward.
Link to Contractor Advice UK group on