So you’ve just been engaged as a contractor or freelancer. What does this mean? Essentially you are a casual worker, hired for a non-permanent job. Be it for two days or two months you will need to consider how you will be paid.
At Frame 25 you have 2 options.
The Limited Company option is the most common option undertaken by individuals who are committed to working in a freelance/contract position long term.
Owning and operating a Limited company allows contractors to be in complete control of their business affairs. It provides the most tax efficient way of managing income and particularly suits individuals deeming themselves to be ‘career contractors’. The limited liability structure of the company also affords protection to the contractor against the company’s debts if it were ever to become insolvent.
To take advantage of this option, the contractor must incorporate a Limited company and this must have a Director / shareholder / employee structure. A business bank account must also be established to facilitate payments in and out of the company.
Given the large amount of administration that Limited companies need to handle and comply with, a qualified Accountant should also be appointed.
To support the work carried out by the Limited company, it will receive a Contract for Service from the recruitment agency / client organisation relevant to the assignment and services it has undertaken. The Limited company will raise invoices at agreed intervals and will receive gross payments directly into the business bank account. The Limited company will subsequently make payments to Directors / employees that are net of statutory deductions and will adhere to HMRC return dates in respect of income tax, national insurance, corporation tax and VAT (if VAT registered).
Financially, this option enables the contractor to maximise their earnings and take home approximately 82% of their gross contract value. The main efficiencies come via national insurance savings, benefits attached to Flat Rate VAT registration, tax relief on business expenditure and bank interest gained from money held on deposit.
The financial independence of running a Limited company has legal responsibilities and carries risks if the business is not administered properly. Professional guidance and support should be sought prior to any set up and key information about business life must be considered.
Legislation must also be considered, as freelance contractors must be able to prove their employment status if they want to secure the significant financial benefits Limited company working can offer. IR35 advice is crucial and must be obtained from employment law experts.
As stated above, this option is well used by career contractors. It can also be a prudent choice for contractors earning more that £25,000 per year on medium term contracts if they believe their working practices and contract terms & conditions place them outside of IR35.
With the right level of support behind them, contractors find Limited company working to be a hugely enjoyable and rewarding experience.
We work with a couple of trusted accountancy services.
Umbrella companies provide a service designed to minimise personal risk for freelance contractors.
On behalf of the contractor, the Umbrella company will issue invoices, receive payments and calculate all income tax and national insurance deductions. It will then pay all net earnings into the contractor’s personal bank account and issue a payslip to confirm all gross/net transactions.
Working through an Umbrella carries none of the IR35 risks/responsibilities that can affect Limited companies.
To facilitate this option, the contractor will become an employee of the Umbrella company, meaning the Umbrella Company will issue the contractor with a Contract of Employment. To complete the contract chain, recruitment agencies and client organisations will issue the Umbrella Company with a Contract for Service to support each individual assignment undertaken by the contractor.
Financially, this option will allow contractors to take home approximately 66% of their gross earnings as opposed to the 64% they would have achieved working direct to a recruitment agency on a PAYE basis.
The Umbrella option can be a prudent choice for contractors wishing to obtain some financial benefits without having any of the risks or responsibilities attached to running a Limited company.
It also serves contractors who believe they would not pass self employment tests / measures and first time contractors wanting to establish themselves within the industry before considering any alternatives.
From April 2016 expenses can no longer be claimed through working via and Umbrella. We wrote a post on this issue here.
There is still time to use the Umbrella option but be aware many of the Umbrellas will be changing their business models to adapt to the change in the law.
We do work with a couple of Umbrella organisations:
Why Can’t I Remain Self Employed?
A lot of contractors ask us this question.
Essentially HMRC want to stop self employed people being engaged by companies when they are completing an identical role to a permanent member of staff. This can be viewed as ‘disguised employment’ as the company is therefore avoiding paying NI and PAYE contributions for the worker.
Having a direct relationship with a self employed worker therefore brings a number of risks to the client and agency. Both can become liable for unpaid PAYE and NI contributions even if the self employed worker has claimed these are paid directly to HMRC.
This is why we choose to only engage the services of Ltd Company contractors for non-permanent work assignments.
Bectu have a specific guide for freelancers working in broadcast –
A Tax calculator – Providing a more specific idea of costs involved from Ltd v Freelance
A key source of well balanced advice can be found through a trusted accountant or financial advisor.