Before you launch your career as a contractor, it is important you are aware of everything you need to know first. There are many financial implications you should consider, from paying tax to employing others – here are five things you need to pay attention to.
Working through an umbrella or setting up a limited company
Perhaps the first thing you need to consider is whether to use an umbrella or a limited company. If you're new to contracting, you might be tempted to work through an umbrella company, as this means you can have assistance when it comes to financial and administrative tasks.
You can make the most of services such as chasing payments from clients and filing expense claims.
However, if you're an experienced contractor, you may prefer to work through your own limited company and engage the services of an accountancy services provider who will assist you with the paperwork that is required. However, you maintain complete responsibility and control over your company.
If you decide to operate through your own limited company , it is important to understand the financial obligations you'll need to undertake as a contractor. One of these is paying your own tax and filing a self assessment tax return. This is submitted once a year and you need to give details of how much money you have earned during the 12-month period.
The tax you owe will then be calculated and you will be charged a certain amount to pay to HM Revenue & Customs (HMRC).
As all the figures need to be precise, it is crucial you keep a close eye on your accounts. You need to make sure they are completely up to date and accurate. This can be complicated in itself especially if you have a high work load anyway which is why it might be easier to let a professional assist with this.
Something else you should consider is taking out insurance. If you make a mistake at work, it could lead to serious consequences, particularly if you do manual work. Without insurance, you will be responsible for these errors. Therefore, it is vital you take out the right insurance for your industry.
Do your research into which insurances you'll need, as there are a variety of options available. Professional indemnity insurance covers negligent acts, public liability protects you if a third party makes a claim against you, personal accident means you are protected if you suffer an incident while working and employer's liability ensures you and any workers are covered if any injuries are sustained.
In order to make your tax payments more efficient, it is important that you record all your expenses. You are entitled to subtract any purchases you make for your business from the amount of money you earn that are tax deductable. So if you have to buy a lot of equipment or tools and do a lot of travelling for work, these costs are taken into account when the HMRC calculates the amount of tax you pay.
It is therefore vital that you keep all your receipts so you can prove all the expenses you claimed.
Again if working through a limited company, you might be contracting alone, or you may wish to take on some employees to help you with your projects. If the latter is the case, you need to consider a number of things before hiring any workers. One of these is making sure they are eligible to work in the UK and are trained for the employment you are recruiting them for. You will then need to make sure you are insured against any injury to them and you have to ensure you set up an appropriate means of paying them.
This will come out of your profit, so don't forget to include this as outgoings when filing your self assessment tax return as well.
If you are confident that you will fall outside of the IR35 regulations and would like to minimise your tax burden, then you should be looking to operate as a limited company contractor. But how do you go about setting up a limited company?
If you're looking to become a contractor, then you need to consider the two main options open to you – operating as a limited company or using an umbrella company. However, you must also be aware that this decision may be taken away from you.
The 24-month rule is something most people have come across, but many will admit they do not fully understand what it is. However, it is particularly important and must be considered when submitting paperwork to HM Revenue and Customs (HMRC).
Working for yourself makes for an incredibly exciting career choice. Not only do you get the chance to set your own hours and choose the projects that excite you the most, but it enables you to operate in a highly tax-efficient manner. Being self-employed also potentially allows you to receive a significantly higher income in comparison to doing the same kind of work as a permanent full-time employee, most notably as you could off-set tax against the expenses that you incur.
Being a contractor gives professionals the freedom to select their own working hours and choose the projects they work on; however, with that comes the need to look after their own payroll and tax issues. With HM Revenue and Customs (HMRC) set to introduce a new payroll reporting system later this year, now is the time for professionals to make certain they are aware of the changes this will entail.
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