Could be contracing soon - Advice please
Discussion
Evening all
Just had a meeting with an ex-colleague about some work and I need to put together a price to work with him as a contractor. Now I've never done this sort of thing before, so I'd like a little explanation as to how I go about getting a price together?
I know what I'm worth as a full time employee, and what I would be paid, but how does this translate in to contract work? Is it the same rate as a freelancer? How do I take into account the loss of a private pension and other benefits I might get as a full timer.
Also, how should you manage the tax? Should I become a company and pay myself a wage? Or just set aside what I need to pay in tax and do self assessment?
Thanks, as ever, in advance, and sorry if there are loads of questions but I've got to get something together fairly sharpish.
Just had a meeting with an ex-colleague about some work and I need to put together a price to work with him as a contractor. Now I've never done this sort of thing before, so I'd like a little explanation as to how I go about getting a price together?
I know what I'm worth as a full time employee, and what I would be paid, but how does this translate in to contract work? Is it the same rate as a freelancer? How do I take into account the loss of a private pension and other benefits I might get as a full timer.
Also, how should you manage the tax? Should I become a company and pay myself a wage? Or just set aside what I need to pay in tax and do self assessment?
Thanks, as ever, in advance, and sorry if there are loads of questions but I've got to get something together fairly sharpish.
Get yourself a good Accountant who can advise you regarding tax and the commercial pros and cons of trading as self-employed or as a limited company. I would wholly recommend doing this up front rather than getting into a mess which will ultimately be costly to unravel or even more costly in tax terms if you make an uninformed choice.
The tax effectiveness of 'going limited' has diminished in recent years and as soon as you mention 'contractor' now the IR35 problem springs to mind. Google IR35 for more info, but in short it relates to HMRC's attempt to stop deemed 'avoidance' by 'contractors' who in broad terms were fulfilling the role of employee but used a limited company between themselves and the employing company to manage their tax more effectively. There are still many ways to safeguard yourself against this, not least by using contracts approved by the Porfessional Contractors Group (PCG) for example.
From a direct tax point of view, the effectiveness of going limited will really depend on your other taxable income, whether you need to draw the monies you earn and your personal situation amonsgt many other factors. It needs serious consideration. From a commercial point of view should you trade as a limited company, you still have to a certain degree the safeguards of limited liability should the company fail (but in reality this is diminished by personal guarantees required by bank financing, HP and even suppliers for newco's).
As for pricing, then it is usual for a rate a good margin higher than an employee rate - without knowing what you do I would guess 20-30% to account for loss of holiday pay, benefits, etc. An 'employing' company will also save hugely on Employers NIC's (normally 12.8% on tiop of your hourly rate) and the now substantial costs and burden placed on employers taking on employees. After all if you really are a contractor rather than an employee, then surely by it's very nature you are taking financial risks which in itself require higher remuneration as well as giving the employing company to use you as and when it wishes, meaning they will be willing to pay a higher rate?
The tax effectiveness of 'going limited' has diminished in recent years and as soon as you mention 'contractor' now the IR35 problem springs to mind. Google IR35 for more info, but in short it relates to HMRC's attempt to stop deemed 'avoidance' by 'contractors' who in broad terms were fulfilling the role of employee but used a limited company between themselves and the employing company to manage their tax more effectively. There are still many ways to safeguard yourself against this, not least by using contracts approved by the Porfessional Contractors Group (PCG) for example.
From a direct tax point of view, the effectiveness of going limited will really depend on your other taxable income, whether you need to draw the monies you earn and your personal situation amonsgt many other factors. It needs serious consideration. From a commercial point of view should you trade as a limited company, you still have to a certain degree the safeguards of limited liability should the company fail (but in reality this is diminished by personal guarantees required by bank financing, HP and even suppliers for newco's).
As for pricing, then it is usual for a rate a good margin higher than an employee rate - without knowing what you do I would guess 20-30% to account for loss of holiday pay, benefits, etc. An 'employing' company will also save hugely on Employers NIC's (normally 12.8% on tiop of your hourly rate) and the now substantial costs and burden placed on employers taking on employees. After all if you really are a contractor rather than an employee, then surely by it's very nature you are taking financial risks which in itself require higher remuneration as well as giving the employing company to use you as and when it wishes, meaning they will be willing to pay a higher rate?
Interesting, I have to say though a lot of the tax stuff has gone over my head a little (very tired tonight) I'll have a re-read in the morning. I'll have a chat with a friendly accountant I'm sure one or two guys know on here 
Thanks for your thoughts though, I'll have another look tomorrow.
Thanks for your thoughts though, I'll have another look tomorrow.
DanX5 said:
As for pricing, then it is usual for a rate a good margin higher than an employee rate - without knowing what you do I would guess 20-30% to account for loss of holiday pay, benefits, etc. An 'employing' company will also save hugely on Employers NIC's (normally 12.8% on tiop of your hourly rate) and the now substantial costs and burden placed on employers taking on employees. After all if you really are a contractor rather than an employee, then surely by it's very nature you are taking financial risks which in itself require higher remuneration as well as giving the employing company to use you as and when it wishes, meaning they will be willing to pay a higher rate?
Leaving the tax issue aside at the moment, I work in the Broadcast sector, and I'll be working as a systems integrator. Which is something they don't have time for and we are fairly specialised in what we do. If I crudely take the base freelance rate (rate x 5 x52) I come out at a figure which is about 20% on what I would take home as an employee, so it's not too far off. They were talking about a 3 or 6 month contract, I'm not sure what the norm in terms of durations is for contractors.
The "entertaining" industry has traditionally used "freelancers" in all sorts of capacities - whether performers or technical. Sound, lighting, gaffers, riggers, electricians etc often operate on a "self-employed" basis.
As a result, the use of intermediary limited companies (common in the IT industry) is less common in the entertainment industry. Now and then HMRC take a look at self-employed technicians in the film/TV/theatre/music industry but so far have had very little success in ordaining that these types of individuals MUST be taxed as employees under the PAYE system.
Having siad that, every individual set up stands on its own merits and you should carefully consider your tax status at the commencement of the arrangement and you should consider whether the option of operating through your own limited company is a viable route to take.
As a result, the use of intermediary limited companies (common in the IT industry) is less common in the entertainment industry. Now and then HMRC take a look at self-employed technicians in the film/TV/theatre/music industry but so far have had very little success in ordaining that these types of individuals MUST be taxed as employees under the PAYE system.
Having siad that, every individual set up stands on its own merits and you should carefully consider your tax status at the commencement of the arrangement and you should consider whether the option of operating through your own limited company is a viable route to take.
theboyfold said:
If I crudely take the base freelance rate (rate x 5 x52) I come out at a figure which is about 20% on what I would take home as an employee, so it's not too far off. They were talking about a 3 or 6 month contract, I'm not sure what the norm in terms of durations is for contractors.
The general rule of thumb is hourly rate = annual salary / 1000 - so if you are in a £60k pa job, then to account for extra tax, pension, holidays etc. etc. you should be looking to charge around £60ph. Either 3 or 6 months is an entirely normal contract duration, less is rare and you would generally charge more, and if longer you could reasonably give a little discount if you were feeling nice All this for IT contracting, although I suspect the general principles are similar for other sectors.
deckster said:
theboyfold said:
If I crudely take the base freelance rate (rate x 5 x52) I come out at a figure which is about 20% on what I would take home as an employee, so it's not too far off. They were talking about a 3 or 6 month contract, I'm not sure what the norm in terms of durations is for contractors.
The general rule of thumb is hourly rate = annual salary / 1000 - so if you are in a £60k pa job, then to account for extra tax, pension, holidays etc. etc. you should be looking to charge around £60ph. Either 3 or 6 months is an entirely normal contract duration, less is rare and you would generally charge more, and if longer you could reasonably give a little discount if you were feeling nice All this for IT contracting, although I suspect the general principles are similar for other sectors.
Thanks for all the advice on this thread.
theboyfold said:
Another thing.
As a contractor, am I entitled to anything like sick / holiday pay? Is there a law to govern this, or is it at the companies discretion?
Not reviewed the whole thread - are you treated as an "employee" type contractor or a "non-employee" type contractor.As a contractor, am I entitled to anything like sick / holiday pay? Is there a law to govern this, or is it at the companies discretion?
Eric Mc said:
theboyfold said:
Another thing.
As a contractor, am I entitled to anything like sick / holiday pay? Is there a law to govern this, or is it at the companies discretion?
Not reviewed the whole thread - are you treated as an "employee" type contractor or a "non-employee" type contractor.As a contractor, am I entitled to anything like sick / holiday pay? Is there a law to govern this, or is it at the companies discretion?
How will you be remunerated. In other words, what will be the nature of the income you receive?
If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
Eric Mc said:
How will you be remunerated. In other words, what will be the nature of the income you receive?
If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
Hopefully this will answer your question. The nature of the income is for my services researching and advising on a new installation they are putting in. They have asked for a cost by the week, for my time. I'm assuming there are no expenses or anything else that I'll be able to charge for, unless there is travel involved outside of the London area.If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
Once I've got all this sorted, I'll have to speak to you offline and see what help I'll be needing from you.
theboyfold said:
Eric Mc said:
How will you be remunerated. In other words, what will be the nature of the income you receive?
If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
Hopefully this will answer your question. The nature of the income is for my services researching and advising on a new installation they are putting in. They have asked for a cost by the week, for my time. I'm assuming there are no expenses or anything else that I'll be able to charge for, unless there is travel involved outside of the London area.If you WANT to go down the non-employee route, then to ensure that you give the Revenue less ammunition to have you reclassified as a PAYE employee - or insist on IR35 being applied - then you MUST insist that NONE of the normal rules, regulations and factors related to being "employed" are applied to you.
On the other hand, if you WANT the security og sick pay, holiday pay etc then you would be inferring that you are an employee of the organisation and therefore would need to be included for PAYE purposes.
Once I've got all this sorted, I'll have to speak to you offline and see what help I'll be needing from you.
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