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 first start up your new business. Our UK contracting limited company guide will research how does contracting work in UK. Besides considering how to get into contracting, in 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 very useful 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 a 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 that you’d like the answers to. In this guide to contracting in the UK, we’ll take a look at how to start contracting (UK). We’ll also look at how to set up and operate your own UK contractor limited company. When you’re in the UK contracting market, besides the actual work in respect of 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, it’s good to know how to run this smoothly and effectively from the outset.

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 here and set you in good stead going forward. Indeed, if you’re good to go contracting in the UK, this guide should be an ideal point of reference. We explain clearly how to operate a limited company for contractors. Moreover, our guide contains lots of good advice (UK) when you go contracting for the first time. Basically, this guide is good for any new contractor in their chosen industry.

When we look at how to start a contracting business there’s lots of things to consider. Basically, besides searching for companies looking for contractors to help land your first limited company contract, there’s other considerations too. Therefore, when you’re getting into contracting, you’ll more than likely need some specialist UK business contracting advice at the outset when first starting up. In this contracting limited company guide we’ll go over this in detail. We’ll go over 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, if you take advantage of the rules that are available, it’s better for you long-term.

Other contracting guides

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

When considering how to go contracting in the UK, we also have a list of the best contracting tips. This covers some good ideas in terms of saving tax to help UK limited company contractors and small business owners. In addition, it also includes the details on specific items you can claim as business expenses as a contractor. Furthermore, it also shows how to operate efficiently when contracting in 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 think about starting out 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), lots of the above questions are covered below. However, if you have specific questions you could search for answers on a contractor UK forum. Basically, we 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’s 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 boss. 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 the terms of the contract they have with their client.

Permanent employees, self-employed & directors of limited companies

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

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

When you become a contractor (UK), there’s many things to consider for limited company contractors (UK). Basically, these include much the same as the self-employed. However, when you’re working as a contractor through a limited company there’s 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 your own UK contracting limited company and are in the UK contracting market.

You may be taking the time to consider should I go contracting? Basically, one of the key items to consider here is your level of estimated income from your new role. As a rough guide, if you’ll be earning over £40K or £50K per annum, it’s 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. There’s lots of good advice contracting wise about what to consider regarding what is a limited company contractor. In the guide, we cover the initial company set-up through to running your own contractor company tax-efficiently on a day-to-day basis.

On this website, we’ve a UK contractor guide which explains how to run your own company. This is our best company guide and explains the areas to consider when you run a limited company. Basically, it gives you lots of general limited company advice which’ll help when you’re 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 have another helpful guide. This shows how you can pay yourself tax-efficiently while drawing income from your company while contracting in the UK.

Finally, there’s also differences depending on whether you’ll be a contractor or a freelancerHMRC community forums also have some useful topics from contractors with their own company.

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

Incorporation of 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 make the move into ltd company contracting for the first time, there’s several ways in which you can complete the company contractor formation process.

Most professionals who move into UK contracting let their accountants form a limited company for them. Indeed, this is no different from an IT contractor (UK) as many of these also 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 you’re becoming a contractor (UK), setting up your own company follows a specific process and can also incur costs. Therefore, we’ll cover the basics steps below. However our article on forming your own company is also a great 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 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 can’t 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. In addition, in some cases they could even ban them from being a director for several years.

Registered office 

As part of our guide, a key thing 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’s several choices when you choose your registered office. Importantly, we recommend you get this official address right from the outset.

Company year-end 

As part of this guide for contractors, we now highlight that every company has to have a financial `year end’. This’ll 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 2023 and don’t choose a year-end, it’ll auto-default to 30 June 2024.

Directors and secretary 

When you’re setting up your own company as a contractor, you’ll have to choose one or more directors. Basically, limited company directors are the people that run and control a UK private company. Therefore, when you become a limited company contractor you should consider, besides appointing yourself as a director, if you’d like to appoint any other directors.

Many UK companies also appoint a company secretary which assist in the easier running of the business. However, this is no longer a legal requirement for private limited companies and as a result, many contractors do not appoint a secretary.

Shareholders 

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 down. An entity, in this context, means an individual or another limited company.

When you set your company up ahead of UK contracting, you’ll need to consider how many shares to issue. In addition, you’ll need to decide who the shareholders are to be. Furthermore, it’s wise to issue more than one share when you’re setting up a limited company for contracting (UK). Indeed, a common choice at the outset is 100 shares. What’s more, if you’re the one generating the work through your company, you’ll want to set yourself up as a shareholder. However, you could also choose to issue shares to your partner or someone else who’s 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. This is especially the case if they’re helping the small business owner run their company.

Statutory records  

When you’re setting up a limited company as a contractor, the next item to consider are statutory records. Basically, all 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 normally 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 considerations 

Guide to contracting UK -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 (also 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 from 6 April 2021. When you’re UK contracting, this means that it’s 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 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, it’s classed by HMRC as being 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 the case that many UK contractors turned to work through umbrella companies, and many still do now. A couple of years or so has now 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 also do your checks by arranging for a contract review with a specialist in this area. Contractor Advice UK recommends Qdos for this service.

Guide to contracting (UK) -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. When you appoint an accountant for your contractor limited company, it’s advisable to do your research as there’s many out there to choose from.

When you’re a contractor, a good piece of advice in this contracting limited company guide is it’d be wise to pick a good accountant who specialises in the UK contracting industry. They should also have detailed knowledge of this sector and how a ltd company contractor operates. 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 accountants 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. When you have your own contractor company, 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’ll also help file other quarterly or monthly returns with HMRC, such as VAT and PAYE.

Every accountant will charge accountancy fees to UK contracting businesses. Therefore, looking for a competitive one with a fixed fee and no hidden extras is advisable. In addition, this page details what the best contractor accountancy services should look like.

Open a business bank account 

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

There are certain aspects to consider in terms of banking as a new limited company contractor. 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 £7 per month. The deals out there are constantly changing on an ongoing basis.

We’ll mention later in this limited company guide about keeping and maintaining your company’s accounting records. We recommend when going contracting for your own company, to keep 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 also 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 -business insurance 

As part of this UK contractor guide, it’s key to note as a small business owner you must consider business insurance for your contractor work (limited company). We have a contractor insurance guide and this highlights the areas you may need to 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 great 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, insurances you may need could include Public Liability, Employer’s Liability, and Tax Protection Insurance (IR35).

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

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 you’re contracting through a limited company you should know how to update and maintain your business records as you go along. This is important, and if you’re organised, it’ll 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. It’s one of our contractor tips is to consider using this if you’re a contractor or small business owner.

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

Section 3 – guide to contracting -contractor taxes and paying tax 

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, a piece of good advice is you should set up a Business Tax account. When setting up limited company for contracting, you can set up the 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 these.

The online account will give you an overview of your contractor taxes as you go forward. It’s important to bear in mind as part of this limited company guide, setting up the Business Tax account 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 to consider when you go into UK contracting for the first time and are starting up contracting in business through your own company. The rule for VAT registration is that if you know your trading income will be over £85,000, you’ll need to register for VAT. However, you can also register for VAT voluntarily.

As part of VAT registration, you’ll also need to consider if the standard VAT scheme or 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 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 a couple of weeks or so to come through the post. Once it does, you can add the VAT service to 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’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 need a PAYE scheme for your company. Indeed, this required so that your company can process payroll. Therefore, your accountant or even you can register your company for a PAYE scheme. As a result, this’ll 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. Basically, 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 -trading as a company

Invoicing 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, it’s key to highlight when you send invoices to your client from your contracted company in respect of your UK contracting services, it’s important to ensure that:

  • 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, as well as other details that are legally required.
  • When you’re billing for expenses, you should ensure you recharge your expenses correctly on your invoice. Basically, there’s a correct way to do this when you’re VAT registered. Indeed, this is something that often confuses contractors.

Claiming 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 which 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 expenses, the benefits are:

  • You’ll save tax on these.
  • Any business expenses that 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 that you might have incurred before the business started. In addition, there’ll also be ongoing business expenses that your business will incur as time moves forward.

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 that it’s also good to know from the outset:

Section 5 -guide to contracting -extracting income from your business 

Considering and deciding on your contracting take-home pay 

When you’re being paid as a contractor through your own company, you need to decide how to pay yourself. What’s more, many contracting companies in 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 salary.
  • Pay yourself dividends.

Reimburse your expenses 

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

Pay salaries when you go UK contracting 

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

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

Most contractors take a salary just above the NI threshold. A salary at this level means there’s a minimal amount of NI to pay. There’ll also be no income tax to pay, assuming you do not have 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. In addition, it could include 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, 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.

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

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

Guide to contracting -company pension 

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

Link to Contractor Advice UK group on

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

Published On: January 4th, 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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