Guide to contracting in the UK.

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Introduction 

This is our complete guide to limited company contracting (UK). It’s a great read if you’re a contractor starting a limited company first-timer. In this guide to contracting in the UK, we’ll look at how to go contracting and how to start up your new business. Our UK contracting limited company guide will research how contracting works in the UK. Besides considering how to get into contracting, we’ll research what else to think about when starting a contracting business in the UK. Within our contractor guidelines, there’s a lot of help for small limited companies. Furthermore, our contracting guide will look at how to set up as a contractor (UK). Our UK contractor guide is an ideal reference point if you’re starting your contracting career. Therefore, this article is an excellent guide to IT contracting or contracting in another UK industry.

When you take the step to set up a limited company for contracting, there may be many questions you’d like the answers to. In this guide to contracting in the UK, we’ll research how to start contracting (UK). We’ll look at how to set up and operate your own UK contractor limited company. When you’re working in the UK contracting market, besides the actual work for your UK contractor services, there can be so much more to think about for UK limited company contractors. It can feel overwhelming, especially if it’s your first time working through a contracting UK limited company. When you have your own contractor company, you’re in complete control of the business. Therefore, knowing how to run this smoothly and effectively from the outset is good.

Guide to contracting -initial thoughts 

How to go contracting in the UK? 

When you’re going contracting for the first time it’s good to be knowledgeable from the outset. This limited company guide aims to assist you and set you in good stead. Indeed, if you’re good to go contracting in the UK, this guide should be an ideal reference point. We explain clearly how to operate a limited company for contractors. Moreover, our guide contains lots of good advice (UK) when contracting for the first time. Therefore, this guide suits any new contractor in their chosen industry.

When we look at how to start a contracting business, there are many things to consider. Besides searching for companies looking for contractors to help land your first limited company contract, there are other considerations, too. Therefore, when you’re getting into contracting, you’ll more than likely require some specialist UK business contracting advice at the outset when first starting up. This contracting limited company guide will go over this in detail. We’ll look at how to set yourself up as a limited company and how to run this effectively and tax efficiently. Indeed, many IT contracting companies (UK) don’t operate tax-efficiently. However, taking advantage of the available rules is better for you in the long term.

Other contracting guides

There are many other UK contractor guides and manuals on the web. Although this guide for UK contractors is quite in-depth, it covers almost all relevant aspects when setting up a contracting business. Indeed, it’s a good reference point and will help you plan to work as a contractor (UK). Moreover, if you’re a first-time contractor reading this limited company guide, it’ll put you in good stead in the future.

When considering how to go contracting in the UK, we have a list of the best contracting tips. This covers some good ideas regarding tax savings to help UK limited company contractors and small business owners. In addition, it includes details on specific items you can claim as business expenses as a contractor. Furthermore, it shows how to operate efficiently when contracting in the UK.

Common questions

If you’re going from employee to contractor, you may have many questions at the outset. Therefore, when we consider how to start a contracting company in the UK, some common questions and thoughts from potential contractors about starting up will include:

  • What is a contractor (UK)?
  • Should I become a contractor?
  • How to be a contractor (UK)?
  • How much do contractors make (UK)?
  • How to set up a contracting business.
  • How to set up a limited company for contracting.
  • How to work as a contractor (UK).
  • What do I need to be a contractor?
  • How do contractors get paid?

When you’re planning on being a contractor (UK), many of the above questions are covered below. However, you could search for answers on a contractor UK forum if you have specific questions. We also have a UK contractor forum on this website where you can post if you’re an official member (it’s free to join). In addition, there are many other forums and contractor news (UK) websites online.

What are my rights as a contractor in the UK?

Per the official HMCE guidelines on `self-employed and contractor’, UK employment law does not cover self-employed people in most cases because they are their own bosses. Therefore, if a person is self-employed, they have the following employment rights:

  • Protection of their health and safety.
  • Protection of their rights against discrimination (in some cases).
  • The rights and responsibilities set out by their contract terms with their client.

Permanent employees, self-employed & directors of limited companies

As a permanent employee, you work a set number of hours weekly or monthly and are paid for your work each week or month. You’ll have specific tasks and responsibilities as part of your permanent employment. Furthermore, employees are entitled to sick pay and an annual holiday allowance.

Sole traders/self-employed are responsible for generating their own income. They must file an annual Self-Assessment tax return. They don’t get paid if they don’t work due to being sick or on holiday.

When you become a contractor (UK), there are many things to consider for limited company contractors (UK). These include much the same as the self-employed. However, when working as a contractor through a limited company, there are additional considerations. As the contractor & director of your own company, you have specific director duties and filing responsibilities. Therefore, there’s plenty to consider when you have a UK contracting limited company and are in the UK contracting market.

You may be taking the time to consider whether you should go contracting. One key item to consider is your estimated income from your new role. As a rough guide, earning over £40K or £50K per annum will make it worth setting up as a contractor (UK). This is opposed to being self-employed or working through an umbrella company.

Guide to contracting UK -what else to consider at the outset?

This guide will give you a comprehensive insight into how to set yourself up as a contractor in the UK. It offers lots of good advice about what to consider regarding a limited company contractor. The guide covers the initial company set-up and how to run your contractor company tax-efficiently in the future.

On this website, we have a UK contractor guide that explains how to run your own company. This is our best company guide and explains the areas to consider when running a limited company. It gives you lots of general limited company advice that helps when starting out as a contractor. Indeed, when you set up a limited company for contracting, there’s quite a lot to think about. This is especially the case if you’re a first-time contractor.

When you have your own contractor limited company, you should aim to be as tax-efficient as possible. In addition, being a contractor in the UK, besides this detailed guide to contracting for your own company, we’ve another helpful guide. This shows how you can pay yourself tax-efficiently while drawing income from your company while contracting in the UK.

There are differences depending on whether you’ll be a contractor or a freelancer. Moreover, HMRC community forums have useful topics from contractors with their own companies.

Section 1 -Guide to contracting (UK) -initial considerations 

How can you form your contracting ltd company?

In this contracting limited company guide, the first thing to consider when you move into IT contracting (or working as a contractor in another industry) is how to set up your company. When you move into Ltd company contracting for the first time, there are several ways to complete the company contractor formation process.

Most professionals who move into UK contracting let their accountants form their limited company. Indeed, this is no different from an IT contractor (UK) as many of these ask their accountant to set up their IT contractor limited company. However, when you plan on software contracting (UK), contracting in IT, or contracting another industry, it’s not too difficult to do the contractor company formation yourself. Indeed, many IT contractors (UK) have followed the steps below when setting up their own company. As a result, once they’re fully set up, they can concentrate on their future IT contracting (UK) career.

When becoming a contractor (UK), setting up a company follows a specific process and can incur costs. Therefore, we’ll cover the basic steps below. However, our article on forming your own company is an excellent guide to setting up a limited company in the UK. This UK company formation guide covers how to open a company in the UK and explains the setup process in more detail.

Guide to contracting -limited liability status 

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

Having said the above, if the company cannot meet its obligations because the director has drawn these amounts out, HMRC could pursue the director personally. In addition, in some cases, they could even ban them from being a director for several years.

What should you consider for your registered office? 

As part of our guide, an essential item to decide on when you become a limited company contractor is the official address for your company’s registered office. When you’re setting up a contracting business, this is the legal address of your new company. Indeed, this is where the official mail from Companies House and the tax authorities is sent. As part of this limited company contracting guide, there are several choices when you choose your registered office. Importantly, we recommend you get this official address right from the outset.

What should you consider for your company year-end? 

As part of this guide for contractors, we now highlight that every company must 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 contractor company. However, if you don’t choose a preferred company year-end, it’ll automatically default to the end of the same month in the following year. Therefore, if you’re setting up a ltd company for contracting in June 2024 and don’t choose a year-end, it’ll auto-default to 30 June 2025.

Who will the directors & secretary be? 

You must choose one or more directors when setting up your own company as a contractor. Limited company directors are the people who run and control a UK private company. Therefore, when you become a limited company contractor, you should consider appointing any other directors.

Many UK companies appoint a company secretary to assist and facilitate the running of a business. However, it’s no longer a legal requirement for private limited companies, and as a result, many contractors don’t appoint a secretary.

Who will the shareholders be? 

In this IT contracting guide, we now turn to shareholders. When you’re setting up a ltd company for contracting, these are individuals in a company who’ll receive a share of the company’s profits by way of dividends. They’re also entitled to a share of the company’s final distribution of funds when it eventually closes. In this context, individuals means a person or another limited company.

When you set your company up ahead of UK contracting, you must consider how many shares to issue. In addition, you must decide who the shareholders are to be. Furthermore, it’s wise to issue more than one share when setting up a limited company for contracting (UK). Indeed, a common choice at the outset is 100 shares. Moreover, if you generate the work through your company, you’ll want to set yourself up as a shareholder. However, you could issue shares to your partner or someone involved with your company.

Generally, a contractor or small business owner with their own company is both the director and shareholder. Moreover, they may appoint their partner as a shareholder and a director. This is especially true if they’re helping the small business owner run their company.

What are statutory records? 

Statutory records are the next item to consider when setting up a limited company as a contractor. All UK companies must keep and maintain statutory records, which show who the company officials and shareholders are, amongst other information. Your accountant will typically look after these records for you. When you’re UK contracting, you should do this too, and your accountant will usually take care of this.

Section 2 -Guide to contracting (UK) -other initial thoughts 

Guide to contracting UK -what is IR35?

In this UK contractor guide, we’ll now look at the history of IR35 and how it works. In recent years, the IR35 rules (known as the off-payroll rules) were first rolled out to the Public Sector on 6 April 2017. More recently, these rules came into place for the private sector on 6 April 2021. When you’re UK contracting, it’s now down to the service provider (for large and medium companies) to determine whether these rules apply to a particular contract. 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’re a limited company contractor, and the business providing services to you (either directly or through a recruitment agency) doesn’t meet two of the three conditions mentioned above. In that case, HMRC classifies it as a small business. As a result, IR35 (off-payroll rules) won’t apply. Therefore, it’s down to the contractor to determine their IR35 status in this scenario.

Due to the shift of responsibility in the private sector in 2021, many recruiters stopped providing contracts outside IR35. As a result, it was then that many UK contractors turned to work through umbrella companies, and many still do now. A couple of years or so have 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 contract is inside or outside the IR35 rules. You can do further checks by arranging a contract review with a specialist. Contractor Advice UK recommends Qdos for this service.

Guide to contracting (UK) -accountant

How can you appoint an accountant? 

As part of our limited company contracting guide, we recommend appointing an accountant when you move into UK contracting. We advise you to look for a specialist contractor accountant from the outset. When you appoint an accountant for your contractor limited company, it’s advisable to do your research, as there are many out there to choose from.

When you’re a contractor, this contracting limited company guide offers some good advice: pick a good accountant who specialises in the UK contracting industry. They should have detailed knowledge of this sector and how a Ltd company contractor operates. A typical high-street accountant may not know certain areas, including the IR35 legislation and the rules around claiming travelling expenses. Furthermore, your contractor accountants should help you with this and future years’ tax planning.

Routine filing your accountant will perform

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

Every accountant charges accountancy fees to UK contracting businesses. Therefore, it is advisable to look for a competitive one with a fixed fee and no hidden extras. This page details what the best contractor accountancy services should look like.

How to open a business bank account 

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

Your banking arrangements as a new limited company contractor will require some thought. Going with a good bank from the outset can save you hassles later. Most high-street banks offer free banking for the first year. After this period, the fee is around £7 per month. The deals out there are constantly changing.

This limited company guide will look at keeping and maintaining your company’s accounting records later. When going contracting for your company we recommend keeping your records on the FreeAgent digital platform. FreeAgent is a top-rated accounting software program for 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 pay the FreeAgent licence fees if you sign up with them from the outset. This is a saving of over £180 a year.

Guide to contracting -which business insurance do you require? 

As part of this UK contractor guide, it’s key to note that as a small business owner, you must consider business insurance for your contractor work (limited company). Our contractor insurance guide highlights the areas you should consider for insurance purposes. When you use Code CAUK10 via our partner’s website, which links from our insurance page above, you can receive a fantastic 10% contractor discount on policies from one of the best contract insurance providers in the UK.

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. This should be part of your overall considerations for your contractor finances. In addition, you may require Public Liability, Employer Liability, and Tax Protection Insurance (IR35).

Insurance is an essential consideration for your business. Indeed, when you work for yourself, it’s good to get your business finances in order. Your contractor’s finances will include banking, accounting, pension, life insurance, income protection, etc.

How to choose a book-keeping/accounting system 

In this limited company guide, record keeping is a key aspect to consider when you run your own business. When contracting through a limited company, you should know how to update and maintain your business records as you go along. This is important; if you’re organised, it’ll make it easier for your accountant. This, in turn, should be reflected in the fees they charge you. As mentioned, FreeAgent is an excellent choice for an online accounting system. One of our contractor tips is to consider using this if you’re a contractor or small business owner.

Therefore, knowing how to maintain your business records from the outset is key. Knowing how long you must keep these records is important, too.

Section 3 -Guide to contracting -contractor taxes 

How to set up a Business Tax account with HM Revenue & Customs (HMRC) 

Next, in our Ltd company contracting guide on how to go contracting in the UK, we recommend setting up a Business Tax account. When setting up a limited company for contracting, you can set up a Business Tax account with HMRC via their website from the outset. In due course, it’ll show your company’s taxes, including amounts due and payments made against them.

The online account will give you an overview of your contractor taxes as you go forward. As part of this limited company guide, it’s important to remember that setting up the Business Tax account yourself will make adding 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 to consider when you enter the UK contracting market for the first time and start up your own contracting business via a limited company. The rule for VAT registration is that if you know your trading income will be over £90,000 (£85,000 up to 31 March 2024), you’ll need to register for VAT. However, you can register for VAT voluntarily, too, if you so wish.

As part of VAT registration, you must consider whether the standard VAT scheme or the VAT Flat Rate scheme is the best option. Nowadays, UK contractors are usually better off under the standard VAT scheme. Once registered (if you’re under the standard scheme), you can reclaim VAT on your costs. Being VAT registered effectively means your VAT-inclusive costs will cost your business one-sixth less.

Once an online VAT registration application is submitted, your VAT number usually takes two weeks to arrive in the post. Once it does, you can add the VAT service to your HMRC Business Tax account. At this point, you can download your VAT certificate.

Corporation Tax 

Companies House will pass the details to HMRC when you set up your company. Once this occurs, they’ll 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 nine months and one day after your company’s year-end.

Payroll tax (PAYE/NIC) 

When you’re a contractor contracting in the UK, you’ll require a PAYE scheme for your company. Indeed, this is necessary so that your company can process payroll. Therefore, you or your accountant can register your company for a PAYE scheme. This will enable your company to pay future salaries, which can be processed via FreeAgent.

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

Section 4 -Guide to contracting -trade as a company 

How to invoice your client 

When you start a new contract as a limited company contractor, you may be required to invoice your client weekly or monthly for your contracting work.  If you’re providing your UK contracting services through an agency for your client, the agency may self-bill, and they’ll send you a remittance advice.

As part of this UK contractors guide, when you send invoices to your client from your contracted company in respect of your UK contracting services, it’s important to ensure:

  • These contain the correct contracting details for your limited company. In addition, the invoice should contain the details of your contracting work for the period in question and other legally required details.
  • When billing for expenses, you should ensure you recharge your expenses correctly on your invoice. There’s a correct way to do this when you’re VAT registered. Indeed, this often confuses contractors.

How can you claim for expenses through your business? 

When working as a contractor for a company or being in business in general, you should claim for your business expenses. Indeed, it’s key to claim for all your business expenses and tax deductions you incur as part of your contracting work. However, it’s often the case that UK contractors and business owners alike miss claiming for certain expenses. Indeed, if you do claim for all your costs, the benefits are:

  • You’ll save tax on these.
  • Any business expenses you’ve 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, you may have pre-trading expenses. These are expenses you might have incurred before the company started. In addition, your company will incur ongoing business expenses as time progresses.

Once you start your company, will you do any work from contracting work from home? If the answer is yes, one of our contractor tips is it’s good to know from the outset:

Section 5 -Guide to contracting -extract income from your business 

Consider and decide on your contracting take-home pay 

You must decide how to pay yourself when you’re being paid as a contractor through your own company. Moreover, many contracting companies in the UK will ask their accountants for advice on their limited company take-home pay. Therefore, in terms of your limited company contractor take-home pay, once it has begun trading, you can:

  • Reimburse your expenses.
  • Draw a director’s salary.
  • Pay yourself dividends.

Reimburse your expenses 

When you run a business, the company will pay for costs and expenses through the bank account. However, you may pay for some business costs personally via a personal credit, debit card, or cash. As a result, your company can reimburse you for such expenses. As a new Ltd contractor, it’s entirely up to you to decide when your company should reimburse your costs. A routine way to deal with this and another of our contractor tips is to refund your expenses at the end of each month. 

Pay salaries when you go into UK contracting  

When you start working through a contractor’s limited company, you’ll consider paying yourself a salary, just like you’d receive if you were employed on the payroll elsewhere.

As part of this IT contracting guide, now that you have your own company, this will be your new employer. Therefore, depending on your circumstances, your contractor options as part of the take-home pay (limited company) are taking a low, middle-level or high salary.

Most contractors take a salary just above the NI threshold. A salary at this level means a minimal amount of NI to pay. There’ll be no income tax on your salary, assuming you don’t have a wage from elsewhere.

If your spouse or partner assists you in running your company, you can 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. In addition, it could consist of responding to and sending e-mails, invoicing and business website work. Importantly, their salary should be at a commercial rate, for the time they spend working for your company.

Pay yourself dividends 

When a company is set up, shares are issued at the outset. Ordinarily, you’d be the sole shareholder. However, you may issue shares to another individual, such as your spouse, as part of the setup process.

The usual best practice is to pay dividends monthly or quarterly. You can transfer the amounts from the company account to your personal or joint account when you pay dividends.

There are many aspects to paying dividends, and these include:

Guide to contracting -company pension 

You can consider setting up a limited company contractor pension scheme. As part of this, your company will make employer contributions to your personal pension scheme.

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

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

Section 6 –Guide to contracting -official filing 

Annual filing 

We now turn to official company and personal filing requirements. When you’re a company director, there are 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 which you file with the tax office.
  • File a complete set of company accounts and company tax return (form CT600) with HMRC.

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 must 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 

This limited company contracting guide details many things to consider when contracting in IT or another industry. A key point is that there are many benefits to setting up a limited company when contracting. Indeed, it’s important to highlight in this guide to contracting that most of the tips above are key when you first set up your own company. Finally, it’s highly recommended that you be organised from the outset as that’ll put you in good stead in the future.

Link to Contractor Advice UK group on

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

Published On: April 6th, 2024 / Categories: First timer guide, Main Guides, Starting Up Your Own Company /

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One Comment

  1. Pillars May 15, 2023 at 12:07 pm - Reply

    This article was an incredibly informative read! As a contractor operating in the UK, I found the guide to be comprehensive and insightful. From the step-by-step process of setting up a limited liability company to the considerations to keep in mind when starting out as a contractor, this article covered everything I needed to know. The inclusion of real-life examples and practical tips made the content relatable and easy to understand. I feel much more confident about my contracting journey after reading this guide. Thank you for providing such an excellent resource for UK contractors!

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