Anyone an IT contractor?

[Kate]

I need advice. I'm currently permanent but have possibly been offered a six month contract elsewhere.

How does it work and how does it compare to standard pay? Eg £20/h, £30/h, £40/h and £50/h works out to what in comparison to annual salary? £35k, 40k, £60k? more (that would be nice!)

Also, how do I go about setting stuff up? I've been told I could set up my own company for about £70 or go through an 'umbrella company', whatever one of those are. And what about tax etc?

[Sudoxe]

Ok this is from memory but here it goes, someone please correct me if I’m wrong.

Setting up your own company:
There are a number of ways you can do this, Sole Trader, Partnership with someone else, LTD Company or PLC.

The two you will be interested in are Sole Trader and LTD Company.

Sole Trader would be basically "Kate trading as Magic Consulting", any debts the company runs up, if the company gets sued etc its down to you. Possibly best avoided if you’re contracting, unless your doing something simple like cutting peoples grass.

LTD Companies:
LTD Companies are very interesting to a contractor since the company is limited, it basically means you (personally) can only be sued for the number of unpaid shares you have. The company name would be something along the lines of "Magic Consulting LTD" with a LTD company however, you have to file accounts to companies house every year along with some other gubbins.

From companies house re: ltd companies…

“Private company limited by guarantee - members' liability is limited to the amount they have agreed to contribute to the company's assets if it is wound up. This includes all RTM (Right to Manage) companies-, commonhold associations and those community interest companies which are companies limited by guarantee.“

Setting up your own company is simple, If you fill out the forms directly via companies house it is very cheap see here http://www.companieshouse.gov.uk/ Or alternatively if you use a registration agent it will cost between 70-150quid.


If your contracting it’s not too bad, but if your setting up your own consultancy you should be prepared (i.e. savings) to live for at least 6months with out any work, whist word gets around, you find regular clients etc.

From memory umbrella companies take a percentage of what you earn and manage all your taxes, accounts etc. But overall I believe if you manage things correctly you would be better off with your own LTD company.

Dan
Not just your garden variety geek.

[MattTheLoony]

I need advice. I'm currently permanent but have possibly been offered a six month contract elsewhere.

How does it work and how does it compare to standard pay? Eg £20/h, £30/h, £40/h and £50/h works out to what in comparison to annual salary? £35k, 40k, £60k? more (that would be nice!)

Also, how do I go about setting stuff up? I've been told I could set up my own company for about £70 or go through an 'umbrella company', whatever one of those are. And what about tax etc?

Would take a while to go through all the ins and outs but here goes the basics.

You HAVE to set up your own company or be part of an umbrella company.

If you do your own there are two kinds, sole trader and a limited company.
Sole trader is the easiest tax wise as you more or less just pay tax on what you earn at the same rate as a normal job.
Limited company introduces a whole of complications as the tax is a lot more complicated, basically it's the company that makes money and you have to pay yourself a salary from the company. You can make tax savings by paying yourself a smaller salary and taking the rest of the money as dividends, therefore paying less tax. You do however have to pay both employer and emploee national insurance. But can also write a lot more off against tax I think.

Most people hire an accountant if they go limited.

An umbrella company is a limited company that basically you send all your money and reciepts to and for a fee they work out everything for you. This cuts down on a lot of the administritive issues that you'd have to take care of yourself.

Another thing to watch out for is IR35. It's a government guideline basically introduced to stop contractors taking the **** with tax avoidance. If your contract is caught by IR35 then you pay tax like a sole trader. I'm not quite sure how they decide what is caught and what isn't but they should be able to tell you that before you start.

Basically it's all a big head f*ck but you can make a lot of money. I would contract myself out at £300-400 a day but depends on what area of IT you work in and the current market climate.

I'm not sure if they exist everywhere but up in Scotland we have an organisation called the business gateway which can offer advice and information on setting up your own company and their definitely worth a visit. Otherwise you'll have to scour the net. I used to have a couple of good links but I don't think I can find them any more.

[rpwoodman]

I was contracting up until recently.

I'm a pretty cautious person, and I wasn't that keen on being taken to court at the end of a tax year because I'd not paid what I should have done. You can be above board, but if the government decides that you're not really a contractor, but someone contracting to reduce tax liability, you can get done.

I went through a company called Giant (http://www.giantgroup.com/) who I found to be very good.
They reduce your tax liability to a minimum but safe level, deal with your travel, subsitence, expenses etc, and will guarantee you won't get done (i.e. they will pay any fines if you do get done).
I found them very responsive when I had questions, and other than one minor glitch, had no problems at all.

I'd speak to them if I were you.

[The Basket]

You apply to an Umbrella Company and they become your 'middleman'.
You work through the Umbrella company...the umbrella company get your money from your employer, they do the tax and stuff, take their share and give you whats left.

Easy peasy.

[Kate]

Cool, cheers guys. I'm leaning towards an umbrella company, at least to get started anyway.

Any ideas on comparing annual salaries?

[MattTheLoony]

Cool, cheers guys. I'm leaning towards an umbrella company, at least to get started anyway.

Any ideas on comparing annual salaries?

You'll need to add up how many hours you intend to work and multiply them by your rate. In theory you should pay no more tax than you do just now ratewise so just do a like for like comparison on the total pay and that will be a worst case scenario for your contracting.

[sharriso74]

Also take into consideration holidays and sick days as you won't be paid for them

[MattTheLoony]

Also take into consideration holidays and sick days as you won't be paid for them

Good point, most people work to a 46 or 48 week year.

[Sudoxe]

Just been reading this - http://www.contractoruk.com/documents/guide_contracting.pdf looks intesting

Dan

[Dave The Rave]

As a self employed you will get lower rate of tax and lower NIC contributions. To simplify the matter you will be better off due to the following. With the same starting salary you will pay less tax and NICs, plus there is a cash flow advantage as well, as you will not pay your tax under PAYE (pay as you earn) scheme but only once a year. But there are no pay holidays and sick so you need to do some thinking. Would advice you to get in touch with an accountant.

[lynw]

As a self employed you will get lower rate of tax and lower NIC contributions. To simplify the matter you will be better off due to the following. With the same starting salary you will pay less tax and NICs, plus there is a cash flow advantage as well, as you will not pay your tax under PAYE (pay as you earn) scheme but only once a year. But there are no pay holidays and sick so you need to do some thinking. Would advice you to get in touch with an accountant.

But this is why it may get caught out under the IR35 rules.

Basically IR35 was bought in with people taking the pee and paying themselves ridiculously low wages and the rest being taken through the company [and duly avoiding the 40% threshold] or vice versa. IR35 is designed to make sure that you cant do this anymore, that if you minimise your personal tax you get hit on the company tax and vice versa.

Oh and you will have the joys of self assessment, VAT registration if your company earns over £60k pa and the above IR35 implications.

Which is why most contractors use said umbrella company or acct. But DO NOT RELY ENTIRELY on them in regard to tax deadlines, chase them to make sure they submit things in time. Because it is YOUR LEGAL responsibility, handing things over to an acct or company to do them is not reasonable excuse - there are hundreds of tribunals and case law to support that.

Re Matt the Loonys last post - not strictly correct. Most contractors will be over the upper threshold and on 40% personal tax rate which will mean more tax. And its a big chunk out of that amount above, a very noticeable one.

[MattTheLoony]

Re Matt the Loonys last post - not strictly correct. Most contractors will be over the upper threshold and on 40% personal tax rate which will mean more tax. And its a big chunk out of that amount above, a very noticeable one.

I meant on earning the same amount of salary you would pay a similar amount of tax. So 30K contracting would be roughly (give or take) the same as 30K PAYE.

And 90K contracting would be the same as 90K PAYE, both would get hit with the 40% tax from around 32K upwards.

[Sudoxe]

Re Matt the Loonys last post - not strictly correct. Most contractors will be over the upper threshold and on 40% personal tax rate which will mean more tax. And its a big chunk out of that amount above, a very noticeable one.

I meant on earning the same amount of salary you would pay a similar amount of tax. So 30K contracting would be roughly (give or take) the same as 30K PAYE.

And 90K contracting would be the same as 90K PAYE, both would get hit with the 40% tax from around 32K upwards.

Yes, but this is only on earnings above the 32?k mark, below is taxed at the lower rate?

Dan

[Ceri JC]

Basically IR35 was bought in with people taking the pee and paying themselves ridiculously low wages and the rest being taken through the company [and duly avoiding the 40% threshold] or vice versa. IR35 is designed to make sure that you cant do this anymore, that if you minimise your personal tax you get hit on the company tax and vice versa.


This is the principle reason my mate stopped working as consultant (through his own company) and instead took up a normal full time job. Until then he had a whale of a time; car, meals, computer, etc. all bought for the company and his own (taxable) salary was just something like £8K.

[MattTheLoony]

Re Matt the Loonys last post - not strictly correct. Most contractors will be over the upper threshold and on 40% personal tax rate which will mean more tax. And its a big chunk out of that amount above, a very noticeable one.

I meant on earning the same amount of salary you would pay a similar amount of tax. So 30K contracting would be roughly (give or take) the same as 30K PAYE.

And 90K contracting would be the same as 90K PAYE, both would get hit with the 40% tax from around 32K upwards.

Yes, but this is only on earnings above the 32?k mark, below is taxed at the lower rate?

Dan

Correct and this applies to both kinds.

[lynw]

Re Matt the Loonys last post - not strictly correct. Most contractors will be over the upper threshold and on 40% personal tax rate which will mean more tax. And its a big chunk out of that amount above, a very noticeable one.

I meant on earning the same amount of salary you would pay a similar amount of tax. So 30K contracting would be roughly (give or take) the same as 30K PAYE.

And 90K contracting would be the same as 90K PAYE, both would get hit with the 40% tax from around 32K upwards.

Yep, but it would be highly unusual for a PAYE employee to be on anything approaching contractors rates.

And it is quite often the switch to contracting which actually puts someone in that bracket for the first time which if they havent thought about it can be a bit of a shock to find 40% disappeared.

[timwilky]

As for contractors taking the Pee, Sorry it is the goverment rules that take the pee out of individuals who are prepared to take the risks of being self employed one man gangs. These guys have to be prepared to risk being out of work for possibly 3 months in any year as "between Contracts" and are not elible for unemployment benifit etc. They have to act as unpaid tax collectors and are liable for any mistakes they make in their returns.

Is it any suprise that people will attempt to reduce the ammount of taxable income when the goverment persists with the rediculous 40% rate and at such a low threshold. It is about time the goverment treated all fairly made a statement that the minimum an individual needs to live on is x (say £15,000) and applied a single rate of tax on all income above that, say 30%. At present there are 3 different rates of taxation, plus 2 rates for national insurance, etc.

[Kate]

Oh and you will have the joys of self assessment, VAT registration if your company earns over £60k pa and the above IR35 implications.

Which is why most contractors use said umbrella company or acct. But DO NOT RELY ENTIRELY on them in regard to tax deadlines, chase them to make sure they submit things in time. Because it is YOUR LEGAL responsibility, handing things over to an acct or company to do them is not reasonable excuse - there are hundreds of tribunals and case law to support that.

I'm going to use an umbrella company where I submit my expenses each month etc and they are going to handle all administration (they say).

I have no idea what this 'administration' is, so how can I find out so that I can chase them as suggested? I don't know what my VAT etc responsibilities are as a contractor, I've always been PAYE and haven't had to do self assessment or anything?

[Dave The Rave]

you really should contact an accountant. For the sake of a small fee you will get an answers to most of your questions. Alternatively I can help you to answer some general questions but would need to know more details about your current earnings, benefits etc. Then we can figure out how much per hour you need to be better off including all the additional information. Do not get discouraged to work on your own it has some serious benefits and it is not that complicated after all. PM me if you need more.

[lynw]

A good agency/accountant should explain your responsibilities.

HMRC will happily do it for free if you contact us to arrange an educational visit.

Bear in mind that when you are self-employed this means you will be on self assessment. The crucial thing to know about that is that the forms have to reach us by 31st January - if its late it will be you who gets the penalty levied. Equally you have 30 days to notify us of starting work as self-employed - again if youre late it is you who pays the penalty.

A good agency will be on top of all that and you would only need to ask "have you done this? do I need to do anything" kind of questions. However, maybe its because of my experience of accountants who have not notified their clients of exceeding the VAT threshold I have an inherent distrust to rely wholly on them. If you exceed £60k, you have to register. If you are late, its you who pays a penalty. There are so many penalties for lateness that I would be constantly at them to check theyve done things theyre supposed to do.

Particularly a good agency will be typically large and trying to do lots of self-assessments before 31st Jan for ALL their clients means the pressure is on and mistakes could be made.

But if you want HMRC to confirm your responsibilities contact hmrc. Details can be found on www.hmrc.gov.uk. Get an educational visit so if all else fails you could do the returns yourself or at least understand whats going on with your money youre earning. :D

[Kate]

Cheers Lynw! This is exactly the sort of info I'm after!