Contractors: Essential Guide October 2016 | Page 3
1 Considering of becoming a contractor?
Generally, a contractor work for a company for a fixed period of time under a fixed contract.
You will either be paid hourly or daily rates. Becoming a contractor requires drive and determination. It is also very imperative that you fully understand the financial implications of becoming a contractor.
The benefits of contracting include:
Being a contractor offers you with more flexibility in relation to your income. By incorporating and using a limited company, you could take some of the income as salary and
some as dividend income. Employees generally have to work set hours, whereas contractors tend to be given a certain amount of work and a time-frame to complete it.
Some contractors may, for example choose to work later in the day or from home.
Contractors setting up a limited company could benefit from savings on employer’s national insurance contributions and dividends. In addition to this, the company can also
contribute to a pension on your behalf and this potentially reduces your company’s corporation tax.
Contractors setting up a limited company could benefit from savings on employer’s national insurance contributions and dividends. In addition to this, the company can also
contribute to a pension on your behalf and this potentially reduces your company’s corporation tax.
The disadvantages of contracting
Contracting offer less job security and are only available for a fixed period and can, depending the terms of the contract, the client could end the contract with little notice.
There is no guarantee of finding suitable contracts following the completion of one contract.
Back up support - there's no HR department or IT support desk to solve issues.
No paid holidays, sick pay but hopefully your contract will reflect these loses.
There are extra administration duties of using your own limited company to undertake
the contract work. These include completion of your company’s annual accounts, corporation tax return, the submission of RTI etc. The good news is that these are all areas
where Odiri Tax Consultants Small Business Accountants can help and this potentially
freeing you from some of the administrative burden.
2 Limited Company V Umbrella Company
The main difference between the two types of business is that a contractor owns the limited
company and umbrella company is where the contractor becomes become an employee of
the umbrella company (employer). The contractor submits timesheets to the umbrella company who in turn invoice the end client (or agency) for the work done by you.
The limited company's contract can either be with the end client or the agency and the company can claim tax free expenses: travel and subsistence, hardware and software, training,
professional subscriptions, business telephone, accountancy fees plus any other business
costs.
Most contractors opt to form a limited company because this option increases the take home pay and generates national insurance contributions savings. As a director of your own
limited company, you are treated as an employee for tax purposes. This is also offer you the
flexibility to pay yourself combination of salary and dividend. Using your own limited
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