When I read a typical article outlining 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).
Of course, if you do decide 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 scheme provider, 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.
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 pretty much all the paperwork, and many of the 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. Completing your Annual Accounts.
Unsurprisingly, an accountant will compile your accounts, and return a copy to Companies House and HMRC each year. You will pay Corporation Tax on your 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.
The typical IT contractor will send an invoice to the agent / client once per month. 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.
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 liability. 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. Again, all of these tasks can be carried out by your accountant (subject to you checking the figures and signing them off).
Read more about the taxes you’ll encounter as a contractor.
Aside from these tasks, there are ongoing admin tasks you may have to undertake, such as chasing the odd overdue invoice, compiling your expenses, and discussing your tax affairs with your accountant (e.g. working out the most tax efficient way to pay yourself).
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, your accountant can take care of almost all of the hassle associated with running a company. They will deal with all your tax affairs, run your monthly payroll, and produce your annual accounts.
You’ll need to keep organised and maintain accurate records, and furnish your accountant with details of all your client invoices, and any expenses you have incurred.
I’d recommend reading our guide to choosing the right accountant as a starting point, and browse our list of 20+ contractor accountants here.
Written by James Leckie
Protect your contract income if you can't work - pay via your limited company