Tax Advice for subcontractors.
What is the best way to set up my business?
I am a subcontractor.
Enter your details below for a free comparison of net earnings.
Self-employed people enjoy considerable tax advantages when compared with employees
First of all we would say contact us and we will work the tax out based on your personal circumstances. All subbies earn different amounts of income and have varying amounts of expenditure. If you simply want to leave your details with us and we will email you back the best solution to suit your individual needs. Please simply fill in the comparison no obligation form below and we will email back to you which is the most tax efficient way to run your business and shows your potential earnings. In only takes a couple of minutes to complete and could save you thousands in tax. Limited Company v Umbrella Company v Full time Paye Employee – Which was saves me most tax.
Option 1: Umbrella contractor.
It is widely believed HMRC wants to phase out umbrella companies and over the past few years has brought in a wide range of legislation to make it ever more difficult and less tax efficient to operate under an umbrella company. Essentially the umbrella company will work out a weekly payslip for you at usually a very high cost for simply completing a paye calculation. From our experience £25.00 per week is not an uncommon amount and seems to be industry average, however, we acknowledge rates can vary. This charge is taken directly out of the contractors’ weekly wage plus any other charges the umbrella company imposes. Tax and National Insurance class 1 will be deducted at source from the weekly wage and paid over to the contractor. Importantly, as from April 2016 no expenses such as travel or food can be claimed by the contractor whatsoever. There is no IR35 option. This is a law that states that no subcontractor can simply work for the same company or individual for a prolonged period as a “disguise” to saving tax. Umbrella companies may suit short term contracts or where work can be infrequent and there may be an option of full time employment. We believe it will be phased out in the next few years or ever tighter restrictions will be enforced upon umbrella companies or contractors operating through them.
Option 2: Limited Company
Most contractors who find their services are in demand and are looking to grow their business generally incorporate in to a limited company as this is deemed to be the most tax efficient way or running their affairs. The benefits are numerous.
- Expenses can be reclaimed daily and offset against trading income. This is not allowed under an umbrella company or operating as a full time paye employee. The rule in relation to expenses is that it must be wholly, exclusively and necessarily for the business trading.
Business expenses may be: Motor Expenses, Travel, subsistence, purchase of vehicles or fixed assets such as equipment (known as capital allowances) and general expenses such as wages.
- A Limited company does not pay class 1 national insurance which an individual operating under an umbrella company or a full-time employee would do. Only individuals pay national insurance. Most limited company directors/shareholders pay themselves a small salary usually the same as their personal allowance £11,000 (2016-2017) and will pay themselves a dividend payments. Dividend payments are taxed at a reduced level up to the higher rate threshold than income tax rates. Therefore, it is generally more tax efficient to operate as a limited company especially the higher the income.
- Importantly, a limited company must be seen to have a varied client base and not just one “client” for a continued and prolonged period as this may flaunt the IR35 ruling which prohibits this. HMRC like to see Limited companies pass certain tests and principles which shows they are not employees or have artificially formed a company to avoid paying additional income tax.
- Cash Flow – A limited company will pay their corporation tax bill some considerable period after commencing trading dependent on when they run their first accounting period too. This could certainly ease the cash flow concerns of the contractor and providing they budget for the inevitable corporation tax liability it may benefit them and allow their business to grow.
Employee: Paye : Agency Worker Being a full-time employee of the agency is generally seen as the least tax efficient option. The reason is that like an umbrella company no expenses can be reclaimed. Individuals may decide to adopt this route if they believe that they are looking for a long term permanent option with the company they are working for on behalf of the agency. You are employed by the agency and each time you leave the agency to join another agency you should adopt a different Paye scheme. Salford Chartered Accountants act for all types of contractors from Locum doctors, I T Contractors, Building contractors, Freelance contractors, consultants and all types of contractors. We will work hard to ensure your individual liabilities are kept to a minimum. We will treat you as a valued client and offer you an excellent personal service by a Chartered Accountant at an affordable fee rate with the best possible tax saving advice for contractors. Call Today for a free no obligation consultation: Salford Chartered Accountants.
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