Trading options available to contractors
How to structure your business
Working as a contractor is an amazingly liberating experience. You can control your own career, and experience the luxury of receiving more money for doing the same job.
To get the most out of contracting you’ll want to arrange your affairs so that you can be paid in the most tax efficient and hassle-free way. A reputable Accountancy firm, such as JSA, will help you structure your financial affairs and keep them well organised and compliant.
There are a number of trading options available to contractors. The two most popular options are:
Before you decide which trading option is best for you, it is important to speak to a contractors’ Accountant and talk through the following considerations:
- The nature of your work
- Your agreed rate of pay
- How much paperwork you are willing to do
- Your long term business plans
A contractors’ Accountant will be able to advise you as to which trading option will legitimately suit your individual contract, requirements, and needs. Significantly they will be able to walk you through the process and give you an income forecast (a breakdown of your earnings, tax and NI), which will display how your trading options directly affect your take home pay.
Why can’t I trade as a self-employed worker?
Working as a self-employed individual is not a realistic option for a contractor. Legislation states that an agency will be in breach of tax regulations if it does not either pay you through a limited company or a PAYE structure. Because of this, it is highly unlikely that you will have the option of trading as a self-employed person, and so you will need to work through an alternative process.
Umbrella Company vs. Ltd Company, which is best for me?
Let’s look at the pros and cons of working through an Umbrella company vs. a Limited Company option.
| Umbrella Company |
Limited Company |
| Advantages |
Advantages |
| The ability to offset certain business expenses |
The ability to offset certain business expenses |
| The rewards of contracting without the responsibility of running your own company |
As a director of your own company you might experience an increased business status |
| Easy to use - You need do nothing more complicated than fill in a timesheet and expenses claim form |
Complete control of the company and its transactions. Simple to administer and operate |
| Your tax will be deducted at source so you can be sure that you have paid the correct amount of tax and NI |
Low salary plus the ability to distribute dividends to shareholders. Dividends taken attract a lower effective rate of tax and/or NI |
| No set up or close down fees and your Umbrella Company will fill in the official paperwork for you |
Great for people who are looking at contracting as a career and who may want to use their company for other business activities. |
| You completely avoid the IR35 tests and are paid under a PAYE structure |
Highly tax efficient way of operating provided that your income is not caught by IR35 |
| An Umbrella Company will carry professional indemnity, public liability and employers insurance for you |
Some firms cover clients under their schemes for professional indemnity, public liability and employers insurance |
| Well suited for short-term or low value assignments |
Well suited to a professional career as a contractor |
| Umbrella Company |
Limited Company |
| Disadvantages |
Disadvantages |
| The contractor will by definition not be running the company and will therefore be using it simply as a service to process transactions |
There are set up and close down costs and a minimum of twelve months commitment to the company |
| You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you |
Time spent on admin. Accounts need to be kept on a weekly, monthly, annual basis. All detailed records for a minimum period of seven full tax years |
Read on...
More information for a First Time Contractor
Contractors Umbrella Company – What is an Umbrella Company - exploring the benefits?
Limited Company option - The ins and outs of setting up a company.
Introduction to contracting – the pros and cons of contracting.
Exploring the pros and cons of contract work – Living the dream and avoiding the pitfalls.
The Contracting Basics - What is contracting and is it a viable option?
Securing a contract – Contracting a lifestyle choice.
The Contract its terms and conditions - How does IR35 Effect me?
For a detailed overview please download JSA's First Timers Guide to Contracting.
You may also find the following pages, guides and testimonials helpful.
Our Services – how JSA can help you
A guide to IR35 – what it means and how it affects you
Case studies – find out what our current clients have to say about JSA
Request a call/email back – we can call or email you back at a time that suits you
Talk to one of our experts
Register your interest online now.
Email our advisors at newenquiries@jsagroup.co.uk.
Or call free phone 0800 25 26 40.