Limited company contracting guide (UK)

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Guide to contracting -introduction 

This is our complete limited company contracting guide. In this guide to IT contracting (and contracting in other areas) we cover all aspects with regard to go contracting and the angles that need consideration when starting a contracting business in the UK.

When you take the step to set up a limited company for contracting, there may be many questions that you would like the answers to. When you are in the UK contracting market, besides your actual contract work, there can be so much more to think about for UK limited company contractors. It can feel overwhelming, especially if this is your first time working through a contracting UK limited company. When you are going contracting for the first time it is good to be knowledgeable from the outset and this guide aims to do this.

Lots to consider

When we look at how to start a contracting business there are lots of things to consider. In this guide we will go over this in detail including how to set yourself up as a limited company and how to run this effectively and tax efficiently. Many UK IT contracting companies do not operate tax -efficiently and if you take advantage of the rules that are available this is better for you long-term.

There are other UK contractor guides out there on the world wide web and this one although quite long covers almost all aspects there are to consider. If you are a first-time contractor reading this guide it will put you in good stead going forward.

Permanent employees, self-employed & directors of limited companies

You will work a set number of hours as a permanent employee. In return, you are paid for your work each week or month. As part of your permanent employment, you will also have specific responsibilities and be expected to complete certain tasks. Employees will also be entitled to sick pay and an annual holiday allowance.

Sole traders/self-employed will be responsible for generating their own income. They will also need to file an annual Self-Assessment tax return. If they do not work due to being sick or being on holiday, they do not get paid.

There are many things to consider for UK limited company contractors, including much the same as the self-employed. There are also specific duties as a director and additional filing responsibilities when you have your own company and are in the UK contracting market.

Guide to contracting -initial thoughts

This contracting guide will give you a comprehensive insight into how to set yourself up as a contractor in the UK. There is lots of good advice contracting wise about what to consider regarding what is a limited company contractor in terms of the initial company set-up through to running your own company tax-efficiently on a day-to-day basis.

On this website, we have a UK contractor guide which explains how to run your own company. This gives you lots of general limited company advice which will help when you are starting out as a contractor. When you first set up a limited company for contracting there is quite a lot to think about, especially if you are a first-time contractor.

When you have your own contractor limited company, you can look to be as tax efficient as possible as you go along. In addition, when you are contracting in the UK we have a guide showing how you can pay yourself tax-efficiently while drawing income from your company.

We also have a list of tax tips to help UK limited company contractors and small business owners and this includes the details on what you can claim as business expenses and operate efficiently.

Finally, there are also differences depending on whether you will be contracting or freelancing.

Section 1 -guide to contracting -initial considerations 

Incorporation of your contracting ltd company

In this limited company guide, the first thing to consider when you move into contracting is how to set up your own company. When you make the move into ltd company contracting, there are several ways in which you can complete the company formation process.

Most professionals who move into UK contracting will let their accountants form a limited company for them. However, it is not too difficult to do the contractor company formation yourself. Forming your own company follows a specific process and can also incur costs.

Limited liability status 

When you are a director of your own contractor limited company, both yourself and the company are two separate legal entities. Your company’s limited liability status means that if it runs into financial difficulties the authorities cannot pursue the director personally for these.

Having said the above, if the reason for the company not being able to meet its obligations is clearly because the director has drawn these amounts out, then HMRC could take further action by pursuing the director personally or even banning them from being a director for several years.

Guide to contracting -registered office 

As part of our contracting guide, an important thing to decide on is the official address for your company’s registered office. This is the legal address of your company. It is where the official mail from Companies House and the tax authorities is sent. There are several choices when you choose your registered office. Importantly, we recommend you get this official address right from the outset.

Company year-end 

Every company has to have a financial `year end’. This will usually be the end of a calendar month. When you move into UK contracting you can pick the year-end as part of the process when you set up your own company. However, if you do not choose a preferred company year-end, it will automatically default to the end of the month in the following year. Therefore, if you set your company up in June 2022 and do not choose a year-end, this will auto-default to 30 June 2023.

Directors 

Limited company directors are the people that run and control a UK private company. You will need to consider, besides appointing yourself as a director, if you would like to appoint any other directors.

Shareholders 

In this contracting guide, we now turn to shareholders. These are individuals in a company who will 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. An entity, in this context, means an individual or another limited company.

When you set your company up ahead of UK contracting, you will need to consider how many sharers to issue. You will also need to decide who the shareholders in your company are to be. Please note that it is wise to issue more than one share when setting up a company. A common choice at the outset is 100 shares. If you are the one generating the work through your company, you will want to set yourself up as a shareholder. However, you could also choose to issue shares to your partner or someone involved with your company.

Generally, a contractor or small business owner with their own company will be both the director and shareholder. They may also appoint their partner as a shareholder and a director, especially if they are helping the small business owner run their company.

Statutory records 

UK companies are required to keep and maintain statutory records. These show who the company officials and shareholders are, amongst other information. Your accountant will usually look after these records for you. When you are UK contracting you should do this too and your accountant will usually take care of this. 

Guide to contracting -IR35 

The history of IR35 and how it works

In recent years, the IR35 rules (also known as the off-payroll rules) were first rolled out to the Public Sector. More recently, these rules are now in place for the private sector. When you are UK contracting, this means that it is now down to the service provider (for large and medium companies) to determine whether these rules apply to a particular contract or not. Before these introductions into the public and private sectors, it was down to the contractor to determine the IR35 status.

As mentioned, the recent change only applies to large and medium companies. Therefore, for any contracts through small companies, the determination of IR35 status still falls upon the contractor.

The definition of a large or medium business meets two or more of the following conditions:

  • An annual net turnover of more than £10.2 million.
  • A balance sheet total of more than £5.1 million.
  • More than 50 employees.

IR35 considerations

Suppose you are a contractor and the business providing services to you (either directly or through a recruitment agency) does not meet two of the three conditions mentioned above. In that case, it is classed by HMRC as being a small business. As a result, IR35 (off-payroll rules) will not apply. Therefore, it is down to the contractor to determine their IR35 status.

Due to the shift of responsibility, many recruiters stopped providing contracts outside IR35. As a consequence, and subsequently, to this, it was then the case that many contractors then turned to work through umbrella companies, and many still do now. A period of time has passed, and recruiters have had the chance to adapt to the changes. As a result, the contract market is slowly picking up again.

When looking for a contract, the recruitment agency will determine whether each contracting role is inside or outside the IR35 rules. You can also do your checks by arranging for a contract review with a specialist in this area. Contractor Advice UK recommends Qdos for this service.

Accountant

Appoint an accountant 

As part of our limited company contracting guide, we recommend that when you move into UK contracting you appoint an accountant. We also advise you to look for a specialist contractor accountant from the outset as this is a good idea.

When you appoint an accountant for your contractor limited company, it is advisable to do your research as there are many out there to choose from.

When you are a contractor, as mentioned, it would be wise to pick a good accountant who specialises in the UK contracting industry. They should also have detailed knowledge of this sector. There are certain areas that a typical high street accountant may not be aware of. These areas include the IR35 legislation and the rules around claiming travelling expenses. Your contractor accountant should also help with your tax planning for the year ahead and in future.

Routine filing that your accountant will perform

Your accountant will assist in filing the annual accounts and annual returns with the UK authorities. These are namely Companies House and HM Revenue & Customs (HMRC). Your accountant will also assist with the updating of your company’s accounting system. Furthermore, they will also help file other quarterly or monthly returns with HMRC, such as VAT and PAYE.

Every accountant will charge accountancy fees. Therefore, looking for a competitive one with a fixed fee and no hidden extras is advisable.

This page details what the best contractor accountancy services should look like.

Guide to contracting -open a business bank account 

As part of this contracting guide, please note once your company is set up, you can then open a company bank account.

There are certain aspects to consider here. Going with 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. After this period has elapsed, the fee is around £6 per month. The deals out there are constantly changing on an ongoing basis.

We will mention further in this article about keeping and maintaining your company’s accounting records. We recommend keeping your records on the FreeAgent digital platform. FreeAgent is a piece of accounting software which is very popular with UK contractors and small businesses. The platform will import transactions from your company’s bank statements, and this helps make your company’s bookkeeping much more accessible. Most banks work very well with FreeAgent. However, Natwest, RBS and Mettle will also pay the FreeAgent licence fees if you sign up with them from the outset. This is a saving of £180 a year.

Business Insurance 

As a contractor or small business owner, you must consider business insurance.

Ordinarily, within your contract terms and conditions, you may be required to take out professional indemnity insurance. However, as part of setting up your company, you should consider if you need any other insurance for your business as part of your contractor finances. This could include public liability, employer’s liability and tax insurance (IR35).

Insurance is an important consideration for your business and when you work for yourself it is good to get your business finances in order. Besides insurance, your contractor finances will include banking, accountant, pension, income protection etc.

Choosing a book-keeping/accounting system 

There is one key aspect to consider when you are running your own business. This is how to update and maintain your business records as you go along. This is important, and if you are organised, it will make it easier for your accountant. This, in turn, should reflect in the fees they charge you. As mentioned, FreeAgent is an excellent choice for an online accounting system if you are a contractor or small business owner.

Therefore, from the outset, it is good to know how you should maintain your business records. Knowing how long you need to keep these records is also good.

Section 2 – guide to contracting -contractor taxes and paying tax 

Set up a Business Tax account with HM Revenue & Customs (HMRC) 

Our ltd company contracting guide’s advice is that you should set up a Business Tax account. You can do this with HMRC, via their website, from the outset. It will show your company’s taxes including amounts due and payments made against these.

The online account will give you an overview of your contractor taxes as you go forward. Setting this up yourself will make it much easier and quicker for you to add your accountant as an agent. We would recommend that over time, once registered for a business tax; you add the services for:

  • VAT -see below regarding VAT registration.
  • Corporation Tax.
  • PAYE / NIC -known as PAYE for Employers.

Register for VAT 

VAT registration is something else to consider when you go into UK contracting and are setting up your own company.

The rule for VAT registration is that if you know your trading income will be over £85,000, you will need to register for VAT. However, you can also register for VAT voluntarily.

As part of VAT registration, you will also need to consider if the standard VAT scheme or VAT Flat Rate scheme is the best option. Nowadays, contractors are usually better off under the standard VAT scheme.

Once registered (if you are under the standard scheme), you can reclaim VAT on your costs. Being VAT registered effectively means that your VAT-inclusive costs will cost your business one-sixth less.

Once an online VAT registration application is submitted, receiving your VAT number usually takes two working days. It then takes a further two working days before you can access your VAT service on your HMRC Business Tax account. At this point, you can also download your VAT certificate.

Corporation Tax 

Companies House will pass the details to HMRC when you set up your company. Once this occurs, they will automatically register your new company for Corporation Tax.

All businesses pay Corporation Tax on their company profits. This tax is payable once per and is due for payment year nine months and one day after your company’s year-end.

Payroll tax (PAYE/NIC) 

Your accountant or even you can register your company for a PAYE scheme. This will enable your company to pay future salaries, which can be processed via FreeAgent.

Tax (PAYE) and NI (National Insurance) are payable to HMRC on the company’s salaries. The tax amounts are ordinarily payable to HMRC every calendar quarter. The payments are due by the 19th of the month after the end of each calendar quarter.

Section 3 – limited company contracting -trading as a company 

Guide to contracting -Invoicing your client 

When you start a new contract, you may be required to invoice your client weekly or monthly.  If you are working through an agency for your client, the agency may self-bill, and they will send you a remittance advice.

Please note that it is important when you are sending invoices to your client:

  • These contain the correct details.
  • You ensure that you recharge your expenses There is a correct way to do this when you are VAT registered. This is something that often confuses contractors.

Claiming for expenses through your business 

When doing this, contractors and business owners can often miss claiming for certain expenses. If you do claim for all of your expenses, the benefits are:

  • You will save tax on these.
  • Any business expenses that you have paid for yourself can be reclaimed from your business. In other words, your business stands the cost rather than you.

When your business is set up, there will be pre-trading expenses. There will also be ongoing business expenses that your business will incur as time moves forward. Regarding claiming for the business expenses which you pay for, you might consider reimbursing these monthly.

Once you start your company, will you do any work from home? If the answer here is yes, it is also good to know from the outset:

Section 4 -guide to contracting -extracting income from your business 

Considering and deciding on your take-home pay 

We now turn to your take-home pay from your company. Once your company has begun trading, you can:

  • Reimburse your expenses.
  • Draw a salary.
  • Pay dividends.

Reimburse your expenses 

It is entirely up to you when you reimburse these to yourself. A routine way to deal with this is to reimburse yourself for your expenses at the end of each month. 

Paying salaries when you go UK contracting 

When you start working through your own company, you will consider paying yourself a salary, just like you would receive if you were employed on the payroll elsewhere.

As part of this contracting guide, now that you have your own company, this will be your new employer. Therefore, you could take a low salary, a middle-level salary, or a high salary, depending on your circumstances.

Most contractors will take a salary just above the NI threshold. A salary at this level will mean there is a minimal amount of NI to pay. There will also be no income tax to pay, assuming you do not have any other salary from elsewhere.

If your spouse or partner assists 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 administration-type work. This could include opening mail and answering the phone. It could also include responding to and sending e-mails, invoicing and business website work. Their salary should be at a commercial rate, for the time they spend working for your company.

Guide to contracting -pay yourself dividends 

When a company is set up, a number of shares are issued at the outset.

Ordinarily, you would be the sole shareholder. However, you may issue some shares to another individual, such as your spouse, as part of the set-up process.

The best practice is to pay dividends on a monthly or quarterly basis. You can transfer from the company account to your personal or joint account when you pay these.

There are also many aspects to paying dividends. These include:

Pension 

You can consider setting up a contractor pension scheme. Your company could also make employer contributions to your personal pension scheme.

Pension payments through your company will save Corporation Tax because these costs are regarded as business expenses.

Making pension payments through your company enables you to extract extra income, which will benefit you personally in the future.

Section 5 -limited company contracting -official filing 

Annual filing 

We now turn to official company and personal filing requirements. When you are a director running your own company, there will be specific filing requirements every year. These are part of your director’s duties, and the main requirements are:

  • File company accounts (financial information) with Companies House. These are a reduced version of the complete set of accounts that you file with the tax office.
  • File a complete set of company accounts and company tax return (form CT600) with HMRC.

Guide to contracting -other filing requirements 

Besides the above annual requirements, you or your accountant will also 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.

Final thoughts 

We detail in this limited company contracting guide many things to consider. Most of these are essential when you first set up your own company. It is highly recommended to be organised from the outset, which will stand you in good stead for the future.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: August 1st, 2022 / Categories: First timer guide, Main Guides, Starting Up Your Own Company /

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