Contracting: How to operate

3-5 mins

If entering the world of contracting has piqued your interest, what are the practical steps you need to take to make it happen? 
We’re going to take a look at your operating structure, which is essentially how you need to be set up for the vast majority of contracts you undertake. 

Realistically, there are two options open to you. 
You can incorporate your own limited company, or you can work through an umbrella company. Most clients will not work with contractors operating as sole traders due to the tax implications.

So, an umbrella company or your own limited company? 

On most occasions, when you contract through an umbrella company you become their employee. They enter into a contract with your agency or client, and they’re responsible for deducting your tax, national insurance and organising elements like tax-deductible expenses. 

An umbrella company’s role is to make contracting as efficient as possible for you, and in return they take a fee, normally as a monthly payment (this is not tied to your day rate). It’s efficient and easy, and relieves you of many fiscal responsibilities. 

Limited Company

When you incorporate your own limited company, you become a company director on Companies House.

There’s no monthly fee involved, but that’s because you’re taking on the legal responsibilities yourself. You must submit an Annual Return to Companies House, register for VAT and pay it quarterly if you earn more than £60,000, pay corporation tax on all your profits and (probably) appoint an accountant to produce your year-end accounts. If you default on any of these elements then you are personally liable. 

On the other hand, you can dictate how you pay yourself, through a combination of salary and dividends, and purchases like a car or laptop can be tax-deductible as company expenses (if used for business purposes). 

Historically, setting up a limited company has been the most tax-efficient way for medium to high-earning contractors to work. However, the government made significant changes to the tax system for limited companies in the latest budget. Dividend allowances changed and corporation tax increased.

Setting up a limited company is still probably the most tax-efficient way for you to work if you are a medium to high earner, but the advantages it holds over other structures have reduced. 

Which operating structure is right for you? 

It really depends on what matters to you. If you want to contract with the minimum of fuss and don’t mind paying a bit extra for someone else to handle compliance, then working through an umbrella company might be the right option.

If you’re open to getting to grips with the nitty gritty of running a business and are prepared for the responsibility and liability of being a company director, you will probably enjoy setting up a limited company. 

Furthermore, if you are only planning to contract for a few years, an umbrella company might be the most hassle-free option, because once you go back to employment, it’s quick and easy to sever the umbrella relationship. If, alternatively, you have aspirations to grow your own business, then setting up a limited company for contracting is a great way of dipping your toe in the water and getting to grips with accounting responsibilities. 

Both options are easier than you might think. Our consultants can easily point you in the right direction which will allow you to establish a limited company within 48 hours – or recommend a list of suitable umbrella organisations. 

Give us a call today on 0161 714 0600 to learn more about what might be right for you.

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