Contractor News Roundup: July 2020
According to recent statistics from two key sources, the manufacturing sector is the place to be if you are a contractor! The latest Chartered Institute of Personnel and Development/KPMG Quarterly Labour Market Outlook for Spring 2011, showed that manufacturers and exporters are the sectors with the most ‘optimistic hiring intentions’ and will continue to see growth through increasing demand from overseas.
Meanwhile, the EEF’s analysis of data supplied by the Office of National Statistics shows that manufacturing jobs have increased by 60% in the last 12 months. This record breaking growth in recruitment means that contractor skills shortages are starting to appear in the manufacturing sector, with the EFF Blog stating that “problems such as skills shortages are emerging.” All of which is of course great news for contractors, or for those thinking of contracting. At SJD we often meet people who are considering it for the first time, and they always have a million questions – so we thought it would be useful to put together a simple FAQ sheet to answer some of the more commonly-asked ones. Hopefully these will answer some of the questions that may be on your mind at the moment. However, if it does not, or you would like more information, please call us on 01442 275789. Alternatively, you can e-mail email@example.com and we will try our very best to help you.
How much can I take home as a contractor?
If you are a contractor working through your own limited company your take home pay will be anywhere between 75% to 80% of your contract value. For example with a daily rate of £200 your take-home would be between £150 and £160. Or with a daily rate of £400, it would be between £300 and £320. Through an umbrella company your take home will only be around 60% – 65% of your contract value meaning that, at £200 per day your monthly saving by going limited would be £700 – and at £400 a day, you monthly saving would be £1,400. These figures are approximate and do not take expenses into account. The main savings with a limited company over an umbrella are based around National Insurance, the Flat Rate VAT Scheme and the benefit of a wider range of expenses. Any accountant or tax adviser will tell you that working through your own limited company is the most tax efficient way of working, which means that you keep more of your hard earned money.
What is best for me – limited or umbrella?
Ultimately, the decision is up to you. Working through an Umbrella company is simpler than working through your own limited company, but you will take home less money from your contract. As a general rule, if you earn more than £25,000 per annum, or if you are on a contract for more than three months and intend to stay contracting for the foreseeable future, then the limited company route would be best for you.
How do I switch from umbrella to limited?
Switching from Umbrella to Limited is simple. All you need to do is form your Limited Company, which will take about five minutes on our website, open a business bank account and appoint an accountant. As soon as your company is formed you can stop working via your umbrella company and start trading through your limited company.
Is there a lot of paperwork?
Paperwork should take no more than around 15 to 20 minutes per month. This includes sending invoices, recording expenses and sending cheques to HM Revenue and Customs, which isn’t much more than if you were to use an umbrella company.
What expenses can I claim?
You can claim anything that is wholly and exclusively for the purposes of your business. This actually includes numerous things such as accountancy fees, business travel, postage, insurance, salaries and Employer’s NI contributions. For a more detailed list of what you can claim for, please download our free guide to Contractor Expenses.
What if I decide to go permanent?
No problem, simply close your company or leave it dormant. We can help you understand what’s best for you if the situation arises.
Do you have any free guides?
We have an extensive range of free guides including a Step-by-step Guide to Contracting through your own Limited Company, a Guide to Contractor Expenses, some Plain English IR35 Advice, a Comprehensive Contractor’s Guide and a Step-by-step Guide to Moving from Permanent to Contracting.
What umbrella company would you recommend if I chose this route?
If you are going to contract through an umbrella company then we would highly recommend our award-winning sister company ContractorUmbrella.
Is there a good time to form a limited company?
Any time is a good time. It’s a myth that April or the beginning of the year/month is best, as it really makes no difference at all. But if you are not planning on working through your limited company straight away, then you are better off waiting until a couple of weeks before your contract starts. It is better to do it in advance of your contract start date, so you have everything ready and can focus all your energy and time on your new contract.
Take home pay calculators – do they really give an accurate amount?
SJD, in line with most other firms, has a calculator on its site. However the major problem with all calculators is that in reality there just isn’t an exact way to predict somebody’s take home pay who works through a limited company, there are just too many variables. The good news is that if you do decide to work through your own limited company you can feel safe in the knowledge that you will be legally working in the most tax efficient way possible. There exists no better or more tax effect way of working, it is simply impossible to take home any more. If you work through an umbrella company you will pay full NI and income tax, just as the same as when you were a permanent employee, plus employer’s NI as well. And you won’t be able to claim the same broad spectrum of expenses as you can through a limited company, all of which results in a lower take home pay.
Why is SJD better than other accountants?
All accountants are governed by the same rules and regulations so it shouldn’t matter tax wise which accountant you use, providing that is they are experts in working with contractors. By working with your accountant at SJD you can rest assured you will be getting the best advice from the UK’s largest multi-award winning firm, plus with office in all cities you can always arrange a face to face meeting with your accountant (without charge) without having to drive hundreds of miles
Can I still pay myself monthly?
Yes. But better still, as it’s your company you can pay yourself whenever you like – although most contractors choose monthly. Your accountant will help you to understand your tax liabilities and how expenses affect your tax bill and take home amount.
What are dividends?
Dividends are just a distribution of your Companies profits to its shareholder (you!). You do not have to pay national Insurance on any dividend payments and so this is a very tax efficient way of receiving income from your company.
How often can I pay dividends?
Dividends can be paid as often as you choose. It is a myth that contractors who pay themselves dividends monthly are more likely to be caught by IR35. They are your profits so you can take them when you like, as long as you leave enough money behind to ensure you can meet your tax obligations.
Do I still have to pay you if I don’t work for a month?
Yes we’re afraid so. Just like you car insurance, our monthly fee is just our annual amount broken down into 12 bites sized payments. However, if you decide to leave SJD at any time, all you need to do is to inform your accountant and then cancel your standing order. There are no exit penalties.
How do I set up a limited company, how long does it take and when can I start to pay myself?
You can form your limited company in five minutes through the SJD website and your company is usually set up within two hours. There is a one off fee of £125 plus VAT and this also includes helping to organise a company bank account and VAT/PAYE registration. And of course, this is a claimable expense through your company. You are ready to receive funds as soon as your business bank account is open. So you can simply transfer money from your business bank account into your personal bank account each month, or whenever you like. Your accountant will help you to understand how much to put aside for tax and what expenses you can claim, as well as answering any other questions that you may have.
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