In guides which outline the pros and cons of contracting via different business structures, the umbrella option is usually labelled as ‘hassle-free’, whereas the limited company path is the ‘tax-efficient route’ (albeit with some ‘hassle’ involved).
But is this true in reality?
If you do decide (or are forced) to contract via an umbrella company, there really is less paperwork to take care of.
As long as you’re capable of extracting a signed timesheet from your client, and submitting it to your umbrella, the umbrella should take care of any admin, and pay your salary each month or week, net of all taxes, the umbrella fee, and any other deductions.
It really is a low-admin way to contract – assuming you use a reputable and efficient umbrella.
If you set up as a limited company director and assuming you’re not caught by the IR35 legislation, you will pay less tax than your umbrella counterparts, but how much so-called ‘hassle’ is actually involved in going limited?
I’ve run my own limited companies for the past 20 years, so I’ve seen all the paperwork, and have experienced many of the typical problems you may encounter as the director of a small company.
When I started out, I was a little intimidated by the thought of ‘running my own business’ – registering for various taxes, dealing with HMRC and Companies House, finding a good accountant and opening a bank account.
But once these tasks were out the way, I can’t say I’ve ever been that stretched by the administrative demands of being in charge of a company.
Running your company
In terms of every day, and annual tasks, the main ones include:
1. Submitting your Confirmation Statement to Companies House.
The Confirmation Statement provides the registrar of companies with an update to the basic information it holds about your company (e.g. change of address/company personnel/share capital).
Simple to complete (typically by your accountant), the main thing you need to watch out for is submitting it before the deadline (typically one month after the anniversary of your company incorporation date).
2. Invoicing and online administration
The typical IT contractor sends an invoice to the agent/client once per month. This is hardly ‘hassle’, although you’d be amazed at how many contractors moan about invoicing.
You can make your life even easier by using an online accounting system (either built by your accountant, or a third party application like FreeAgent).
With online software, you simply set up the client’s details, create and submit an invoice, and be happy in the knowledge that the invoice has now been lodged with your accounts data, and any late payments can be tracked with ease.
Online accounting software will typically link to your bank account(s), so you will be able to record any entries as income or expenditure.
Aside from these tasks, there are ongoing tasks you may have to undertake, such as chasing the odd overdue invoice, labelling any expenses (and uploading receipts)
3. Completing your Annual Accounts.
Unsurprisingly, an accountant will compile your accounts, and return a copy to Companies House and HMRC each year.
You need to pay Corporation Tax on the company’s profits within nine months of the deadline.
In terms of ‘hassle’, you need to make sure you keep accurate records and let your accountant have details of all your invoices and expenses.
For most contractors, this doesn’t involve any rocket science – you may have just 12 monthly invoices and a bundle of expenses.
And, chances are, everything is already recorded on FreeAgent (or another type of online accounting system).
4. Paying your taxes
Most limited company contractors are VAT-registered, so each quarter you’ll need to submit your VAT return and pay the tax liability within a month of this date.
Once again, if you use FreeAgent or Xero, your VAT return can be submitted automatically via a link to your Government Gateway account.
If you set up a direct debit, not only do you get at least an extra 7 days to pay your VAT, you don’t need to do anything else.
Corporation Tax is paid annually, so you shouldn’t be too stretched there.
As a company director, you’ll also have to register to pay your personal tax via self-assessment by the end of January each year. This is the deadline to both submit your personal tax return, and pay any tax. You may also need to make a payment on account by 31st July the following year.
Read more about the taxes you’ll encounter as a contractor.
Golden rules for keeping on top of your limited company admin
I’m familiar with how limited companies work, so it’s easy to write an article describing how ‘hassle free’ being a director of a small company can be. It’s easy to forget how bewildering things can be when you’re first starting out.
With this in mind, I recommend you bear these five things in mind before you set up a new company for contractor:
- As a director, remember that you are ultimately responsible for your company, not your accountant.
- Make sure you know what your responsibilities are as a director.
- Make sure you know what your tax deadlines are (very important).
- Above all, make sure you hire a good accountant (see below).
- If you’re ever in doubt about anything to do with running your company, ask a professional.
Hiring a helping hand
If there’s one single thing you could do to ensure that your life as a limited company contractor is as stress-free as possible, it is to find an efficient, communicative, and accurate contractor accountant.
In fact, an accountant can help directors with most aspects of running a limited company.
They will deal with HMRC and Companies House, assist the company with its tax affairs, set up a monthly payroll, and produce annual accounts.
For the relationship to work, however, you need to keep organised and maintain accurate records.
If your accountant uses FreeAgent (or other accounting software), make sure it is updated regularly – especially at the end of each VAT quarter.
I’d recommend reading our guide to choosing the right accountant as a starting point and browse our list of 20+ contractor accountants here.
Also be aware of the Managed Service Company Legislation. This ambiguously worded legislation aims to clamp down on accounting providers who effectively ‘control’ their clients’ companies.
Directors should be in complete control of their companies’ tax affairs – but aided by professionals – such as accountants.
Written by James Leckie
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