Getting started as an IT Limited Company contractor in the UK

30.05.2019

Congratulations on your decision to take the leap into IT contracting! It’s such an exciting time, yet there’s plenty to get your head around and ensure you’re fully prepared before your first day with your new client. So where do you start?

In this blog, Jenny Winslow from Intouch Accounting looks at what UK based contractors need to consider, the different ways of setting yourself up, and how HMRC legislation can affect contractors.

 

Setting up a limited company for contracting

Step one - Deciding on your business model

One of the very first decisions you’ll have to make is deciding on how you’ll set yourself up as a contractor.

There are three main options for contractors to consider:

  • Forming a Limited Company
  • Contracting as a Sole Trader
  • Contracting under an Umbrella company

In this blog, we will focus solely on a Limited Company set up. For serious IT contractors who are looking to earn more than £30,000 per annum and contract for a period longer than six months, this option provides the greatest opportunity to maximize your contractor take-home pay.
 

Benefits

Benefits of Limited Company

Let’s take a look at some of the benefits of being a Limited Company -

  • Tax and National Insurance Contributions (NICs) - As a Limited Company director the majority of your income will be made up from dividends, which are subject to different tax than a regular salary. NICs are not payable on dividends, which also ultimately means more money in your pocket.
     
  • Expenses - Being Limited means you’re entitled to claim more allowable business expenses, and as they are deducted only from your company’s profits (and you are only taxed on profits), if profits are reduced, so is your tax bill.
  • VAT Flat Rate Scheme (FRS) - If your annual turnover is below £150,000 you’re eligible to join the FRS. This means you’re able to pay a fixed rate of VAT and keep the difference you charge clients / ultimately pay to HMRC (for example, you charge VAT at 20% to your client, and pay HMRC 16.5%, keeping the 3.5% difference using the FRS).
  • Liability - As your Limited Company is a separate legal entity in its own right, you’re protected by having limited liability. This means that should the worst happen you’ll only be personally liable for your company’s debts to the extent of any shares you’ve paid for, and any unsecured loans made to the company.
  • Professionalism - Being Limited shows you’re serious about your career and you see a future in your chosen field. For some clients, this can equal a higher level of confidence in you as a contractor and you may find yourself being hired more frequently as a direct result.

 

Increased Responsibility

As a Limited Company contractor, you’ll have greater responsibilities than if you were contracting under an Umbrella or as a sole trader. It’s up to you to ensure you meet all your director’s responsibilities.

These responsibilities include:

  • Following the company’s rules
  • Informing shareholders (if there are) if you might benefit from a company transaction
  • Keeping records about the company itself, alongside financial and accounting records
  • Informing about company changes: Address, new directors or secretaries, etc.
  • Filing company tax returns and paying corporation taxes.

Bear in mind that even if you hire someone (e.g. an accountant) to help you with the business, you’re still legally responsible for your company’s records, changes, taxes, accounts, and performance. Read more on the gov.uk website.

 

 

Step two - Forming your Limited Company

  1. Get advice - speak to an expert contractor accountant who will be able to talk you through the best business model to suit your contracting goals, and will help you in moving forward. They’ll also explain how legislation (such as IR35) will affect you, ensure you’re fully compliant with HMRC and their deadlines, and ultimately keep you on the right side of the taxman.
     
  2. Choose your company name - here’s the fun bit! You can either choose a name that represents you as an individual, your company or industry, or you can be a bit bolder and choose a name that will stand out and show off your personality. There are rules which all Limited Companies must adhere to, so it’s worth checking with the Companies House register if your chosen name is acceptable. An accountant can register your company for you, or you can do this yourself via the gov.uk website.
     
  3. Appointing directors - your Limited Company must have at least one director who is responsible for running the company. Their name and address will be publically visible at Companies House, but should you prefer to keep your personal address private, your accountant may let you use their office address.
     
  4. Work out your shares and shareholders - if you are the sole owner of your Limited Company, you will own 100% of the shares. If you decide to appoint another shareholder, you can issue them any number of shares at any value.
     
  5. Complete the memorandum and article of association - this involves all shareholders signing a legal statement which agrees to form the Limited Company and agree with written rules about how the company is to be run by all the directors and shareholders.
     
  6. Register your company with Companies House - you are able to do this via the gov.uk website for £12, or your accountant can do it for you.
     
  7. Register for Corporation Tax - you must do so within three months of incorporating your company.

Now that your company is all set up, you’re ready to get going on your very first contract. So let prospective clients know you’re open for business!

Promote yourself in social media, update your professional profiles, sing up to a freelance website (like freelancermap, create a freelance account) and if you struggle at some point, remember there’s plenty of professional help and advice out there to make your journey as easy as possible.

Happy contracting!

 

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