So you’re ready to be your own boss, congratulations! That’s the easy part! What can be difficult, is deciding what your business model is going to be. If it’s your first time contracting, it can feel a little overwhelming with the different options available, so here’s a breakdown to help you understand it all a little bit better.
There are three different models you can use: a Limited Company, a Sole Trader or an Umbrella Company. Each have their pros and cons depending on your own personal circumstances. Before you decide on anything, we do recommend speaking to a professional contractor accountant, because they will be able to give you tailored advice to ensure you’re picking the best business model to maximise your take home pay.
- Professional image
- Minimal personal liability
Setting up as a Limited Company contractor is one of the most common business models for contractors. While it may sound like a lot of work, it’s actually very simple, and very efficient. This method means you would register your company name at Companies House, and you would be the director of the business.
The benefit of trading this way is that your Limited Company would have it’s own legal identity, separating the business’s assets from your personal assets, meaning you are protected and there is very little liability.
A Limited Company is also incredibly tax-efficient, as you will be not only the director, but an employee of your business, meaning you can pay yourself in a combination of salary and dividends, to lower your tax bill and maximise your take-home pay.
- Easy set up
- Less paperwork
- Part-time/casual work
If you’re still unsure about fully taking the leap into contracting, then you may wish to set up as a Sole Trader to begin with. It’s incredibly easy to set up as a Sole Trader and is likely more suited to you if you are going to be doing some freelancing or contracting work alongside employment, or if you’re just starting out and unsure what your earning potential will be.
As a Sole Trader, you own your business, and you are responsible for paying tax and National Insurance on the total profits made by you. In this instance, there is no separation between you and your business, therefore you will be personally liable for any losses. If you plan to contract or freelance long-term, this may not be the most tax-efficient business model for you.
- No admin
- IR35 safety
- Short-term contracts
Contracting under an Umbrella Company means that an agency (the Umbrella), creates a contract between you and the end client. In doing this, they also take care of all your invoicing, tax and payments – similar to if you were an employee.
The client pays the Umbrella Company who then deduct a fee for their services along with your income tax and National Insurance. While this is a simple way to set up as self-employed, you will be giving up more of your profit to pay for the Umbrella fees.
If, however, you are taking on short contracts, or you are accepting a contract which falls inside of IR35, an Umbrella Company can be a safe and easy way to ensure you’re doing everything the correct way.
What business model is right for you?
While they all have their advantages and disadvantages, if you’re still unsure, ask yourself these questions:
- Are you planning on contracting for six months or more?
- Will you be earning over £140 per day?
If you’re ready to start your own business and make it your sole source of income then trading as a Limited Company will see you keep more of your earnings.
With the impending changes to IR35 legislation, it is now up to the end client to decide your IR35 status. While there will be rules in place to stop blanket decisions being made about contractors’ status’, you may want to switch to an Umbrella Company for certain contracts if you are worried about your IR35 status. However, If you are genuinely working outside of IR35, then you can continue to do so as a Limited Company.
Unsure what this all means? Read our IR35 Guide for a better understanding. For more information on IR35 we recommend speaking with a specialist contractor accountant who can give you tailored advice to ensure you’re getting the most of out contracting.
At Intouch Accounting, we offer unlimited IR35 advice and contract reviews for Limited Company Contractors to help maximise your take home pay while staying on the right side of the taxman. If you would like some help in getting your company set up, then you can give us a call on 01202 069 490 and we’ll be happy to help.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.