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Contracting through your own Limited company is the most tax efficient way of working. Basically you can take home more of your hard earned money, any accountant or tax expert will confirm this.
In principle, your company can deduct from turnover any type of expenses which aren’t specifically disallowed by HMRC, or capital expenditures. Additionally, you can claim expenses that have a both personal and business elements as long as you accurately apportion the expense and only claim for the business use element.
Here are some typical business expenses you can set off against Corporation Tax:
You should always ensure that you keep all of your receipts and invoices in order to prove that any claims you have made have been legitimate. If you are in any doubt over what you can and can’t claim through your limited company, ask your accountant.
How do I set up a company?
Once you’ve made the decision to contract under your own Limited company, the next step is to form your company. The process takes a few minutes to complete our one page form, following which your company will be formed same day if within normal work hours so all you need to think of is a company name.
You will be surprised at just how little extra work there is to get your company up and running. The team here at T2UK will help you understand how much to pay, invoicing cycles, expenses and completion of tax forms to ensure you comply within the HMRC guidelines.
Why not have a no obligation meeting with Alex, Simon or Kieran from Transition to discuss you potential retained earnings through a limited company? Simply click and e-mail firstname.lastname@example.org for an appointment.
We have received a large number of queries from contractors in relation to the closing of limited companies due to the fact their chosen service provider is in the process of being dissolved or whereby the contractor’s provider is based offshore and hasn’t been paying employer's National Insurance contributions.
Each individual situation is different however if you decide you no longer need your limited company, Transition will review the most cost-efficient and compliant way to shut down your limited company to ensure you’re not hit with a tax bill when you return to New Zealand or Australia.
In some instances contractors have been quoted in excess of £650 to close down their existing limited company!
Assuming the company is not in financial difficulty, a contractor’s limited company that has been used only to provide the services of the contractor can be struck off if, in the previous three months it has not:
• Traded; the contractor has issued no invoices and has only paid creditors
• Changed its name
• Engaged in any activity except those required to strike off the company.
If the above conditions are satisfied, Transition can start the process of closing the company and assist with the following:
• Informing HMRC (for corporation tax, payroll and VAT purposes)
• Company accounts prepared to the final date of trading
• Company accounts submitted to the HMRC with a Company Tax Return
• Inspector of Taxes for the company payroll informed, HMRC issue P35
• Ensure the balance of PAYE and NI Contributions are paid
• Contractor to inform HMRC that the company has ceased trading
• Deregistered for VAT along with VAT return
• Informing any co-directors and shareholders in writing (DS01 form)
• Corporation tax, payroll and VAT are all different departments therefore all three must be informed
• Final payments and closing the bank account
• Review remaining assets in the business and pay final dividends
• Review Capital Gains Tax (CGT) liabilities arising from final payments
• Form 652a is submitted to the Registrar at Companies House
• Note any cash or assets left in the business after dissolution automatically goes to the crown
Assuming there are no complications, which will be the case for most contractors who are sole directors and shareholders of their own limited company, the Registrar at Companies House will advertise the dissolution of the company in the London Gazette.
Transition exists to provide Kiwis and Aussies with a professional service at an affordable price, avoiding any surprise tax bills when you return home! The majority of limited companies have been closed for roughly £400, simply e-mail email@example.com for a quote.
Meaning - IR35: The Intermediaries legislation was introduced on 6th April 2000. Being inside or caught by IR35 means that for tax purposes one will be judged as being a disguised employee and thus decidedly pay more tax. IR35 ensures that you pay tax similar to what you would pay if you were employed rather than being a contractor i.e. you have to pay additional tax and National Insurance Contributions.
The aim of the legislation is to eliminate the avoidance of Tax and National Insurance Contributions (NICs) through the use of intermediaries, such as Personal Service Companies or partnerships.
Example of Disguised employment: If a permanent employee leaves the company on Friday afternoon & then returns to work on Monday morning in the same company for the same job position but as a contractor (paid on an hourly/daily rate via invoice) rather than a permanent employee (paid on an annual salary basis).
The aim of the IR35 legislation is to stop people leaving full time employment and then returning to the same job immediately as a contractor working through their own Limited company, in order to reduce their tax liability and their NI payments.
If you are inside/caught by IR35 is there any benefit in trading through my own limited company?
If your contract is inside IR35, then you can still claim: travelling & accommodation expenses, pension payments, business travel, & medical insurance benefits. There is also a provision for intermediary expenses of 5% of a contractor’s turnover. IR35 workers also benefit from the VAT flat rate scheme saving around £2,000 a year & receive interest on the funds held within your own company. If we look from a financial view-point then it has significant scope. One more important point to be noted is that if there is any other contract/project work you want to do (for a different client) can also be put through your existing company.
If you are confused whether your contract falls inside or outside IR35 then please get in touch with us and we will look over it for you.
What kind of working practices and contractual conditions are HMRC looking to see if you're inside or outside IR35?
IR35 rules & regulations are very complicated, and while the list below is not an inclusive list, it does provide a few pointers to help you get started:
Control: The first practice to be taken care of is that will you be able to work under your own control which means that you will not be managed by the client.
Financial risk: Although profit share is common place in the employed world, it is without exception in owner managed companies. Also, employees rarely risk financial loss by being employed, whereas if you buy assets such as PC's, laptops, servers, printers, office equipment, or a client fails to pay you as Director of your company you will most definitely experience financial loss.
Substitution: There is also a clause in your contract concerned with substituting someone else to perform the tasks that has been contracted to do by your company.
Provision of equipment: It is also the question of whether you will be using your own equipment during the contract. In the modern day corporate world this can sometimes be difficult as companies have their own security measures and procedures in place which can include the use of personal laptops/equipment to be forbidden.
Right of dismissal: There should be provision in your contract for immediate termination that the client wish to do so. If you have a fixed notice period then the HMRC can and will argue for this being the same as a standard employee contract.
Employee benefits: There are several common employee benefits which you cannot claim which include holiday pay, sick pay, pension contributions, training courses, Christmas dinners, the annual staff summer outing, etc.
HMRC will not only look at the above considerations, they will review every facet of the contract and working conditions in order to establish if you are an employee or a Director managing & controlling your own Limited company.
An umbrella company offers an employment facility for contractors who don’t want the hassle of running their own limited company.
Our umbrella company removes you from the administration and hassle of running you own company. We do everything for you, from invoicing to payroll, leaving you with more time to do what you enjoy.You can relax in the knowledge that all your UK tax and legal obligations are being taken care of by us.
If you want to focus purely on what you do best as a contractor, and not spend you weekends poring over business accounts or filing tax returns, then our umbrella company is the solution for you.Our umbrella company acts as your employer, handling everything from invoicing to UK tax.
~ We handle all your invoicing, accounts, UK tax returns and business administration
~ You’ll be fully covered by our Personal Indemnity, Personal Liability and ER insurances
~ As an employee you won’t need to worry about IR35 or MSC (Managed Service Companies) legislation
~ Tax-deductible expenses are claimed on your behalf and offset against your income, so you maximise your take-home pay
~ You’ll have ongoing access to a dedicated account manager who’ll be able to address any concerns and answer all your queries
~ Signing up with our umbrella company takes less than an hour
~ If you’re already with an agency tell us who it is and we’ll manage your contract
~ You send us your timesheets and we raise an invoice for your agency on your behalf
~ On receipt of cleared funds we process your payroll and take care of all UK tax payments
~ Your payslip is issued to you
It’s simple – no accountancy hassle or tax concerns make it easier for you to leave your work at work
What is an Umbrella Company?
Umbrella companies occupy an important niche in the contracting side of the UK job market and staffing sector, providing a service that even a seasoned professional contractor would find of use. Using an umbrella is the main alternative to setting up your own limited company where you would be a named Director.
The main reason for working through an umbrella company is to serve as an intermediary between the contractor and their end client where they are performing their daily duties, with their principal responsibility being to organise payment for your work.
The main difference between operating via your own limited company and under an umbrella is your employment status. When operating your own limited company, you are a full Director of the business and can take advantage of a variety of methods for minimising your exposure to tax albeit with the the fact you take full responsibility for your financial affairs. When working via an umbrella, you are an employee and will therefore pay slightly more in PAYE and National Insurance contributions, although the bulk of the paperwork and back-office administration is carried out for you.
Working through an umbrella company is straightforward. Once the contract is agreed, you will be required to log your time using a timesheet, which will normally be countersigned by your client. This is then forwarded to the umbrella company (some will want the actual timesheet, while others may offer an online utility where you can upload the details) who will use it to invoice the client. Once the client has settled the invoice the umbrella company will forward payment to you, less their fees and any tax or NI due, usually along with a pay slip that gives full details of how your pay has been calculated.
Different umbrella companies have their own payment schedules – some will forward your funds as soon as they receive the funds from the client, while others pay out on a regular date, with either a weekly or monthly payroll. You should also be clear about the fees you will pay. Umbrella companies will normally deduct their fee (which can be a fixed amount or a percentage of earnings) before tax, which will reduce your tax liability, and it is important to choose one that can offer out of sync pay runs in the case of emergency. Be sure to confirm whether the fee includes all relevant insurances for you being onsite.
It’s easy to dismiss the use of an umbrella company as a half-hearted approach to contracting that sacrifices many significant advantages of an independent career and which represents an unnecessary bite out of your profits, however there are many benefits as well – one of the most important being that they will perform most of the administration for you leaving you with time to work on the projects, build up your skillset, CV and more importantly your reputation.
Many contract professionals who are currently operating in the UK in their relevant sectors, choose to run their contracts via their own Limited Company, of which they are the Director and Shareholder. Operating this way enables you to retain more of your invoiced income due to the responsibilities that come with running your own company, as it has to be fully compliant with the UK Tax office (Her Majesty’s Revenue & Customs) regulations.
At some point you will need to engage the services of an accountancy practice, of which there are many thousands in the UK, so it is important you choose one that is not only fully competent with what is required of them, but also that they offer you the best possible value for money as well as seeing you as the customer, rather than £££ signs at the end of the email exchanges.
While some accountancy practices will quote what seems like an extremely competitive monthly fee that offers best possible value for money, there will inevitably be extra bills for standard procedures such as Company Formation (setting up/registering the company with Companies House), sending out Incorporation Certificates, setting up of PAYE, Corporation Tax & VAT schemes with HMRC, monthly or quarterly accounts, VAT submissions and then year-end tax returns.
Here at Transition, we have the ability to truly tailor the service to your needs, whether you are looking for us to offer a full concierge service where we can even set up your monthly payments each month and monitor the company account, pay relevant VAT /Corporation Tax at the correct times, to the basic service of processing then submitting your relevant tax returns at the end of each financial year to HMRC. Our main aim is to make the back end process and legal requirements as simple as possible for you, leaving you with the time to concentrate on your professional working hours each week, and then the time to enjoy your hard earned income during your leisure time.
Extracting money from your limited company?
The money sat in the company’s bank account is not your money. You can extract this in two ways:
1) Salary – through the PAYE system, you can extract your company’s profits by paying yourself a salary as a director of the company.
2) Dividends – as a shareholder of the company you receive dividends as a distribution of the company’s profit.
We will work out the best structure to use, which is usually a combination of salary and dividends.
Day to day running of your limited company?
It is essential that you set up a bank account for your limited company in which you can pay in the money you receive from customers and pay out the expenses you incur during the course of your business. You are required to retain records relating to your business including:
There are a number of taxes which you could be subject to through running your limited company:
Corporation tax – the company’s profits are subject to corporation tax (the small companies rate is currently 20%).
VAT – if your company is VAT registered, you will have to charge VAT on your sales (the current rate is 20%) and report and pay it over to HMRC on a quarterly basis.
PAYE and National Insurance – if you take a salary (or pay a salary to others) from the your company this will need to be reported to HMRC on weekly or monthly basis and the appropriate PAYE and National Insurance paid over.
As part of our service we ensure that the relevant returns are made on time and that you know what you have to pay and by when, so you can avoid any late fines or penalties.
Avoiding the common pitfalls!
Expenses – keep track of any out of pocket expenses you incur on behalf of the company (including business mileage). Failing to keep a record these will result in an increase in your company’s corporation tax bill and could increase your personal tax bill as you can reclaim these from the company tax free.
Taxes – Corporation Tax is payable nine months after your accounting year end, VAT is payable on a quarterly basis. You need to manage your cash to ensure you have sufficient funds to cover these liabilities when they fall due.
Business account – your company’s bank account should be used for company receipts and payments only. Using your business account as a personal account will only create more headaches for you and your accountant.
We will discuss all your needs with you prior to putting a quote together that will have the full list of services included that we will not then add to outside of the monthly service charge. The only time there will be an extra cost outside of the monthly fee will be when the time comes to dissolve the company (if you decide to leave the UK or move into permanent employment). As this is a process that takes over 3 months and involves extra work there is an extra charge, which will always be quoted before any work is started.
If this sounds of interest to you or any friends you know that are contracting, please get in touch to arrange a chat so we can provide a free no-obligations assessment and service quote. You can either register at www.transition2uk.com or email us at firstname.lastname@example.org
The majority of our business since we started trading 4 years ago has come through customer referrals. Whilst we are considered a small business compared to the larger accountancy practices, we are experienced enough and agile enough to offer a service that not only offers fantastic value for money, but will also provide true customer service to what we see as a truly valued client.
If you need to speak outside of the usual office hours (as many of our Health Professional clients need to do), then let us know and we will contact you before or after work at a time that is convenient to you. We do not stick to the normal 9-5 as customer service is central to our company ethos!
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An umbrella company offers an employment facility for contractors who don’t want the hassle of running their own limited company. You can relax in the knowledge that all your UK tax and legal obligations are being taken care of by us.
If you’re working as a contractor the most tax efficient way of working is to set up a limited company. Becoming the director and shareholder of your own limited company allows you to withdraw funds from your company as dividends, rather than receiving all your income as a salary - reducing the combined tax you and your company pay.
The Agency Workers Regulations (AWR) is a piece of EU legislation that was implemented in the UK in October 2011. It has huge implications for temporary work agencies and the contractors, freelancers or temps who find work through them.
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