Contractor FAQ

Should I use an Umbrella Company or my own Limited Company?

A Limited Company is the most tax efficient, legally compliant structure for Freelancing and Contracting in the UK where there is a turnover of over £35k per annum. A Contractor can typically expect to be taking home between 75%-80% of their contract value by using their own Limited Company. The exact percentage will depend upon their contract value and personal circumstances.

An Umbrella Company is a useful short term stop gap solution. If you are unsure on how long you will be contracting for, but if you have committed to a career as a Freelancer or Contractor or expect your contract to last for over 6 months then a Limited Company will be the most legally tax efficient structure for you.

The reasons that a Limited Company is more tax efficient than an Umbrella Company are the benefits of being able to deduct a wider range of expenses against tax, a reduced rate of national insurance , and the flat rate scheme for VAT. If you were to use an Umbrella Company you would be taxed as though you were a permanent employee and pay full national insurance and income tax, whilst not being able to claim the full amount of your expenses against tax.

Is it difficult?

It involves forming a Limited Company and opening a bank account, which we can do for you. This simply involves completing our simple form, and thenmaintain your company records using an easy online tool that we provide for you. It should take you no more than 15mins per week.

What about expenses?

Providing the expenses are wholly and exclusively for the purpose of your business then they are allowable for a deduction against taxin your Limited Company. Typical expenses a contractor would put through their Limited Company would be travel expenses, accountancy fees, postage, subsistence, mileage, parking fees, pension expenses, IT expenses, mobile phone, and home office expenses. Check out our guide on expenses for further information.

Do I need an Accountant?

The answer to this is not necessarily, but you would need to learn all about accounts and the complexities of the UK taxation system and the workings of HRMC. The UK has one of the most complex taxation systems in Europe and there are many pit falls to catch you out. If you decide to use an accountant to assist you then should choose one that is an expert in working with Contractors and Freelancers. See our do I need an accountant guide for further information.

Can I pay myself monthly?

For most Contractors the most legally tax efficient way of being remunerated is a small salary and a dividend. The salary should actually be paid as a salary, i.e. monthly, at a regular date and reported through an HMRC registered payroll. Dividends can be paid whenever you like provided there is money in the company to cover the taxes due and you do the necessary paperwork.

What are dividends?

Dividends are a distribution of your company's profit. You can pay dividends to shareholders in the Limited Company. Dividends do not attract National Insurance tax and are tax free to your basic rate band limit, so they are a very tax efficient way of extracting your money.

What is IR35?

IR35 is a piece of legislation which has caused Freelancers and Contractors concern for over ten years now. We can check your contract and ensure that it is compliant, and advise you on your working practices. Please see the IR35 section on our website.

Freelancer Accounting is a specialist provider of fixed fee accountancy services to freelancers and contractors in London and the South East of England.

We understand that tax is complicated and we are happy to offer you face to face meetings at one of our office locations convenient to you.

You will have your own dedicated accountant as a point of contact.

We are accredited by the Professional Contractors Group (PCG) and are an ACCA Practice, so you will never have to worry about you tax and accounting affairs again.

If you are thinking of contracting or an existing contractor with questions and would like further advice, please do not hesitate to call your local Freelancer Accounting office on 0800 1357157 or email martyn@freelanceraccounting.com