Suppose I had just been offered a contract yesterday, whats the next thing I need to do ?

Any tips from seasoned contractors ?

 

You'll need either a limited company (plus business bank account, and potentially an accountant, and be VAT registered depending on what you'll earn), or go via an umbrella which may be simpler/less costly initially, but they'll take a cut.

 

I'm a self employed electrical contractor, so I presume the same rules apply?

All I had to do was ring up the Inland Revenue and make an appointment to register as self employed at their local office. You don't have to be a limited company if you don;t wish to be, and you don't have to register for VAT until your company turnover breaches £61,000 per annum. Although check that figure as it changes on occasion.

 

You'll definately need to go Ltd, if you don't then you'll end up paying standrad PAYE.

Changes to legislation mean Ltd is the only cost efficient way to contract, even that's changed slightly as you now need to be in charge of your own finances so you'll need a business bank account.

Try looking at Paystream or Giant

You'll be better off financially if you register for the VAT flat rate scheme, which is 13% for IT contractors, I think you get 1% less for the first 12 months as well.

Also, be very careful if you decide to assign B shares to your partner to reduce tax liability, there's a case in the House of Lords, the Inland Revenue against Arctic Systems which may change the rules there as well.

See below:

Jones v. Garnett - A summary of the facts, and HMRC's argument

The facts (this is a version abridged by me, taken from the Special Commissioners decision)
The Special Commissioners discovered a happily married couple, Mrs Jones - an experienced catering manager with skills in financial and business management and Mr Jones - an IT specialist.
The couple decided to start an IT business together, and then discovered that IT agencies and potential clients only dealt with limited companies. They found an accountant who advised them to set up Arctic Systems Limited, he advised them that the standard method of doing this was for each of them to own a half of the company. They acquired a share each. Mr Jones was made director and Mrs Jones secretary. No reason is given why each took the roles they did, nor is there a reason why they were not both directors, nor her sole director, and he secretary.
According to the articles of the company, the director could refuse to do certain things, such as authorise share transfers, but the couple were not aware of these details, nor did they attach any significance to them.
Mr Jones worked as an IT contractor, and Mrs Jones did the financials and office side. Advised by the accountants, they took minimal salaries, and the balance in dividends.

HMRC's argument (again, abridged by me)
The setting up of the company, the payment of less than market salaries, and the payment of dividends, which enabled Mrs Jones to share earnings which were solely those of her husband, was a settlement. It was an arrangement carefully constructed to enable Mr Jones to save tax by diverting a share of his income to his wife, and thus saving higher rate tax.
In making this argument, HMRC allege that Mrs Jones's salary (which works out at about £5, per hour) was commensurate with her duties and skills (she worked 4 to 5 hours per week), and Mr Jones' salary, which as at an hourly rate is much lower (but we do not know how many hours he worked a week to be sure of how much lower), was not at "market rate". Due to the fact that Mr Jones did not take a "market rate" salary, there is evidence of him foregoing income for the benefit of his spouse.
There is an exemption for gifts between spouses (s.660A(6) ICTA 1988), which provides (in short) that a gift is effective providing that it is unconditional and the whole of the property given is not wholly or substantially a right to income. In this case, no property was gifted, therefore, no exemption.

If the ruling in the House of Lords goes for the Inland Revenue then I'm sure they'll close that littrle loop hole.

I'm no expert though and I'm sure someone on here will correct me if I'm wrong!!

Good luck anway

 

It is anticipated that the House of Lords will uphold that decision.

 

So, do you end up better off compared top the equivalent perm salary ?

 

Well, you'll pay yourself a minimum wage and then the rest will be paid out in dividends which will be subject to Corporation Tax.

So yes you should end up better off than as a permy.

 

You'll be much better off

 

I used OrangeGenie - Contractor accountants and Umbrella payroll services. when I was contracting, there are a few problems with some of the other umbrella companies with the way they work and what the chancellor is bringing in which means that the "employees" are going to get hit for some tax back to HM government.
IR35 isnt the way to go now, not for short term contracting, it takes a year before you start seeing any benefits and also the likes of mileage is being binned (for both IR35 and PAYE) because the chancellor is looking at saying these are permenent places of work.... real pain.
Your also not entitled to sick pay or holiday pay from your employer, so you have to make sure you can cover the costs out of your wage packet, though insurance policies are available (my last umbrella co had lots of info and policies that would cover you for said problems).
Lots more cons than pro's really, did just over 4 years of contracting now back in the "secure" work where I now get proper courses/training and benefits but its worth doing for a short time if the money is good

Tony

 

I don't get how these tax savings work

If you are classed as an employee and go down the standard PAYE route then you are using the normal tax bands.

Going limited and paying a minimum wage (low tax band), but then your income is topped of with dividends that are also taxed. Not to mention that your company is also paying corporation tax on profits.

 

Have a look at this site :-

Professional Contractors Group - Home

 

Thanks

 

I'm with a personal service company called Brookson. They'll do everything for you including setting up a business bank account for you, tax return, insurance, etc. Obviously they take a small fee but in my experience they are the best at what they do.

 

I am now the director of a limited company, OrangeGenie sorted it out, 88.07 a month to do pretty much everything.

 

Congratulations

Did you go with J4CKO Ltd?

I'm looking into doing the same thing myself at the moment, but it's not easy to make the leap... just bought a new house too. Did you leave your last job already, or are you on a notice period? I was wondering how much harder it would be to secure a contract if I still had 4weeks notice to go?