Contracting - Worth setting up as Ltd company?
Discussion
Hi all and Happy New Year!
I recently started as a contractor for a large company in the Project Management field.
Currently I'm working as PAYE through the agency who I was recruited through.
Is it still worth setting up as a Ltd company?
I know new rules have been in place since last April (?) making it less tax efficient to set up a Ltd company. Is this the case or is it still worth doing?
Any help / advice much appreciated. Thanks.
I recently started as a contractor for a large company in the Project Management field.
Currently I'm working as PAYE through the agency who I was recruited through.
Is it still worth setting up as a Ltd company?
I know new rules have been in place since last April (?) making it less tax efficient to set up a Ltd company. Is this the case or is it still worth doing?
Any help / advice much appreciated. Thanks.
Yes, at present it's still financially beneficial to be Ltd when contracting as you can claim for expenses, take dividends and generally be as tax efficient as you can be.
One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
Autopilot said:
Yes, at present it's still financially beneficial to be Ltd when contracting as you can claim for expenses, take dividends and generally be as tax efficient as you can be.
One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
It was rumoured for a while that these changes above would come in for all LTD, whether that be public or private sector. When announced though it was just public. Does this read that the government need to get their own house in order before imposing these changes on others? IMO, the one man band contractor will be a rare breed in 5 years time, the government want everyone on PAYE.One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
Talk to an accountant.
I'm a long-term contractor and am inside IR35.
Yes, I'm worse off that I was when outside and paying dividends, but pension is a small holy grail, if these are your thing.
You are still able to pay up to £40k a year into an approved pension scheme off the top line of your company before the the IR35 'deemed salary' calculation comes into play. This has obvious benefits for your higher rate tax position, and for me (previously frittering cash away on boy's toys) it made me focus on putting something away for my retirement.
People have varying views on the performance of pensions, but I'm taking the pragmatic view that my money is tax free on the way in and at 55 (currently, but likely to rise to 57 by the time I get there) I will be able to take 25% of my pot as a tax free lump sum. Whatever the remainder does (it is fairing pretty well, as it goes) is largely not too much of a concern of mine - I'd just rather it were in my pension rather than HMRC coffers, even if it loses a small amount - it is still mine to use in retirement.
That is a great benefit over PAYE, assuming of course that your rate allows you to make the contributions. My pension pot is also available as a lump-sum death benefit to my wife and son if I should croak before I retire - not much use to me by then, but a great help to them.
I'm a long-term contractor and am inside IR35.
Yes, I'm worse off that I was when outside and paying dividends, but pension is a small holy grail, if these are your thing.
You are still able to pay up to £40k a year into an approved pension scheme off the top line of your company before the the IR35 'deemed salary' calculation comes into play. This has obvious benefits for your higher rate tax position, and for me (previously frittering cash away on boy's toys) it made me focus on putting something away for my retirement.
People have varying views on the performance of pensions, but I'm taking the pragmatic view that my money is tax free on the way in and at 55 (currently, but likely to rise to 57 by the time I get there) I will be able to take 25% of my pot as a tax free lump sum. Whatever the remainder does (it is fairing pretty well, as it goes) is largely not too much of a concern of mine - I'd just rather it were in my pension rather than HMRC coffers, even if it loses a small amount - it is still mine to use in retirement.
That is a great benefit over PAYE, assuming of course that your rate allows you to make the contributions. My pension pot is also available as a lump-sum death benefit to my wife and son if I should croak before I retire - not much use to me by then, but a great help to them.
Definitely talk to a good accountant and one aware of contracting. I'm considering a role at £600 per day, which compared to current paye salary is nearly £40k higher annually. But, the contract is initially a 6-month engagement and when I take into account the benefits a permanent role gives me, doesn't look quite as attractive. Without the numbers being worked through with my accountant, I'd have naively jumped straight in.
andyc11 said:
Definitely talk to a good accountant and one aware of contracting. I'm considering a role at £600 per day, which compared to current paye salary is nearly £40k higher annually. But, the contract is initially a 6-month engagement and when I take into account the benefits a permanent role gives me, doesn't look quite as attractive. Without the numbers being worked through with my accountant, I'd have naively jumped straight in.
I'm hoping to be in a similar position soon - would you mind either sharing here or by PM the info you've found out please? For the record, I've not yet set up anything and am not yet contracting.Contracting is going through a sticky patch at the moment as the government has changed the rules with regards to public sector contracts.
The new rules come into force in April and as yet nobody really knows how it's going to end. I would sit tight in any permanent position for at least the next few months to see how it plays out.
The new rules come into force in April and as yet nobody really knows how it's going to end. I would sit tight in any permanent position for at least the next few months to see how it plays out.
I'm still working the figures through myself - not to say I believe they're wrong but I'm not the best with numbers at the best of times.
Essentially, I'd have the wife in as a director of the limited company under my name and pay her (and myself) a salary from my day rate. This is £917 per month each, which is our tax free allowance. I'd then pay each of us a monthly dividend of £2.6k (doesn't need to be this much and need to figure out why that number), leaving around £3.4k in the business account each month. Dividend tax and corporation tax is then due and this is the bit I'm trying to figure out. The point of contracting for me is to save as much cash as possible that I may need to get my hands on once I wind the company up and go back to perm employment - it's basically to boost a deposit for a house. We've just had a little one and Mrs unlikely to go back to work so the mortgage on a perm wage with a dependent isn't quite what we want hence the contracting to boost our deposit and get the mortgage we want when we buy.
My accountant advised me that I can't touch the money in the business account without penalty later down the line, which makes contracting not as attractive as I initially thought - but only due to my circumstances rather than anything. The high level projections he gave me were:
Income - £127.5k
Less -
Salaries - £22k
Accountancy fee - £1k
Other - £1k
Net profit - £103.5k
Corporation tax due (Dec '18) - £20.7k
As I say, still need to get my head around this myself. When I take into account my pension, life insurance, healthcare (all good benefits in perm employment for me), it becomes less attractive, although when all is said and done, would still be earning more than perm employment but I just can't touch the money in the same way I can on PAYE.
Essentially, I'd have the wife in as a director of the limited company under my name and pay her (and myself) a salary from my day rate. This is £917 per month each, which is our tax free allowance. I'd then pay each of us a monthly dividend of £2.6k (doesn't need to be this much and need to figure out why that number), leaving around £3.4k in the business account each month. Dividend tax and corporation tax is then due and this is the bit I'm trying to figure out. The point of contracting for me is to save as much cash as possible that I may need to get my hands on once I wind the company up and go back to perm employment - it's basically to boost a deposit for a house. We've just had a little one and Mrs unlikely to go back to work so the mortgage on a perm wage with a dependent isn't quite what we want hence the contracting to boost our deposit and get the mortgage we want when we buy.
My accountant advised me that I can't touch the money in the business account without penalty later down the line, which makes contracting not as attractive as I initially thought - but only due to my circumstances rather than anything. The high level projections he gave me were:
Income - £127.5k
Less -
Salaries - £22k
Accountancy fee - £1k
Other - £1k
Net profit - £103.5k
Corporation tax due (Dec '18) - £20.7k
As I say, still need to get my head around this myself. When I take into account my pension, life insurance, healthcare (all good benefits in perm employment for me), it becomes less attractive, although when all is said and done, would still be earning more than perm employment but I just can't touch the money in the same way I can on PAYE.
Edited by andyc11 on Tuesday 17th January 02:31
Edited by andyc11 on Tuesday 17th January 02:35
andyc11 said:
I'm still working the figures through myself - not to say I believe they're wrong but I'm not the best with numbers at the best of times.
As I say, still need to get my head around this myself. When I take into account my pension, life insurance, healthcare (all good benefits in perm employment for me), it becomes less attractive, although when all is said and done, would still be earning more than perm employment but I just can't touch the money in the same way I can on PAYE.
Not sure what you mean by that, you have far more flexibility running your own company to distribute the money in the way you want! As I say, still need to get my head around this myself. When I take into account my pension, life insurance, healthcare (all good benefits in perm employment for me), it becomes less attractive, although when all is said and done, would still be earning more than perm employment but I just can't touch the money in the same way I can on PAYE.
Edited by andyc11 on Tuesday 17th January 02:31
Edited by andyc11 on Tuesday 17th January 02:35
As above - it sounds like your Accountant might not be a specialist in the IT Contracting world.. I can reccomend an excellent one if you're thinking of switching?
The most important thing to remember is to keep your personal accounts and business accounts completely seperate.
I have two business accounts; a 'Current' and a 'Savings'. On every paid invoice I transfer a calculated Corporation Tax and VAT amount from my business Current account into the Savings account.
I then can clearly see how much 'floating' cash I have in the business, which can be paid out as drawings as and when it is needed
Remember to keep a ~6 month float in the account for a rainy day.. As you never know when you'll be out of contract
The most important thing to remember is to keep your personal accounts and business accounts completely seperate.
I have two business accounts; a 'Current' and a 'Savings'. On every paid invoice I transfer a calculated Corporation Tax and VAT amount from my business Current account into the Savings account.
I then can clearly see how much 'floating' cash I have in the business, which can be paid out as drawings as and when it is needed
Remember to keep a ~6 month float in the account for a rainy day.. As you never know when you'll be out of contract
Autopilot said:
Yes, at present it's still financially beneficial to be Ltd when contracting as you can claim for expenses, take dividends and generally be as tax efficient as you can be.
One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
Not strictly true, the agency ends up being liable, not that it's an issue for the contractor. I am certain that the public sector initiative is the tip of the iceberg and they will push this into the private sector in due course (so all contractors need to sit up), the whole process is a nonsense as the on line test to prove (or otherwise) IR35 compliance is completely biased in favour of falling inside. The OP should contact a few decent Umbrella providers and hope to gain some unbiased advice, also worth getting in touch with some of the excellent freelancer organisations.One thing to be aware of is IR35. In April, new IR35 rules fall in place if working for a Public Sector client. The onus falls on them to prove if you're inside or outside or IR35. If HMRC disagree if they investigate later, the Public Sector supplier will be liable for the tax owed.
I read on ContractorUK the other week that an NHS organisation sent all their contractor staff a letter saying that as of Jan 01st 2017, new terms are being imposed and they are treating all contractors (at this organisation) as being inside IR35 which means they deduct tax at source, so most benefit is removed straight away. If you're inside IR35, you also cannot claim travel expenses, another big benefit, so make sure you choose any subsequent contracts wisely and with eyes open!
You can get to some of that money by paying it into your own pension, plus I am sure there are many other expenses you can transfer to the ltd co (phone / broadband being obvious ones just to start with) - facing a £20k corp tax bill would be madness.Mine is £7k this year on a bit less turnover admittedly.
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