Contractor's Guide to Moving from Permanent to Contracting
Top tips on what, why, when, how and in what order!
Download your free guide on Moving from Permanent to Contracting here.
On the whole, contractors earn more than their permanent counterparts. Which is only fair enough, bearing in mind the benefits that they have to give up. This step-by-step guide will tell you how to find a contract and what to look for, as well as giving details on the alternative ways to operate – e.g. how to actually take home an income from your contract!
Finding a contract
The good news is, despite the fact that the economy isn’t booming, the demand for contractors, freelancers, interim managers and consultants doesn't appear to have slowed.
Corporates, and even government agencies, are turning to this highly-skilled and mobile work force to perform tasks and manage projects. Contractors and interim managers offer far more flexibility and have a much lower long-term cost impact options, when compared to the option of taking on permanent members of staff.
Finding a contract is really no different to changing jobs. You’ll need to make sure your CV is fully updated and then target recruitment agencies which specialise in your particular field.
Ways to operate - Limited Company or Umbrella (and the perils of IR35!)
Click here to review our comprehensive comparison table which indicates the differences between working through your own Limited Company or through an Umbrella Company.
Essentially, if you are outside IR35 and intend to be contracting for over three months, you’ll more than likely take more money home if you work through a Limited Company, but you’ll have to do more administration than you would if you opted to work through an Umbrella Company.
So, more money but more work through a Limited Company and less work and less money through an Umbrella Company.
IR35 – this was launched by the government in order to stop permanent members of staff from switching to contracting but retaining the same benefits, risks and working practices as an employee, as well as being able to take more money home by working through their own Limited Companies.
Providing you take the necessary precautions, such as ensuring that you meet all of the conditions in your contract required to stay outside of IR35, and your working practices reflect the contract, then you really have very little to worry about. Click here for further details about IR35.
Working through your own Limited Company - timeline for getting things ready
If you choose to operate through your own Limited Company what do you need to do first and what is the timeline?
1. Establish your IR35 status
WHEN: before you sign your contract
As soon as you find a contract and you have accepted it, try to establish whether the contract is OUTSIDE IR35 (sometimes called IR35 friendly) or in INSIDE IR35 (caught by IR35).
Even if your contract is inside IR35, in financial terms it may still be worth working through a Limited Company, as you will only pay tax on 95% of your contract (rather than 100% if your work through an Umbrella Company) and you will also still be able to benefit from the Flat Rate VAT scheme.
The Flat Rate scheme is an incentive provided by the government to help simplify taxes. It means you charge VAT on your invoices at 20% but only pay back 13.5% of the gross amount in your first year and then 14.5% in subsequent years.
This provides the following additional income (based on a 45 week working year):
£200 per day contract - £1,710 extra profit per year
£350 per day contract - £2,992.50 extra profit per year
£600 per day contract - £5,130 extra profit per year
2. Form a Limited Company
WHEN: Ideally organised 5 to 7 days before you sign the contract, but can be the same day if necessary.
Forming a Limited Company only takes five minutes. You will need your Limited Company name, certificate of incorporation and company registration number before you start work, as the contract will need to be in the name of your company. If you form a company using SJD’s online service, you will have all of these within four hours of forming.
Our online company formation service is extremely popular with over 95% of contractors using it prior to becoming a client. The fee is only £125 plus VAT, which is one of the lowest fully inclusive fees in the market, you can buy cheaper but they very rarely include everything you need or offer any after sales service.
Our formation service offers same-day formations and includes opening a company bank account, VAT/PAYE registration and advice on share structure, click here to use our free limited company name checking service.
3. Appoint an accountant
WHEN: Ideally a few days before, but can be done at any point
Take home pay, dividends, expenses, profits, salary, benefits, personal allowances, tax planning . . . You are likely to have 101 questions, and your accountant will be able to answer them all, guiding you on the most tax efficient way to operate your Limited Company. Click here to see just what your accountant will do for you. To appoint SJD Accountancy please click here.
SJD offer a complete fixed fee package including: completion of accounts, payroll bureau, dividends, corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant, all company returns, in fact, everything you need for a fixed monthly fee of just £110 plus VAT, again this is one of the lowest prices around.
4. Open a Business Bank Account
WHEN: At least seven days before you are due to be paid
If you want to get paid you’ll need one of these! If you form your company with SJD Accountancy, we will send you an application form for a business bank account which will take around a week to open.
SJD Accountancy recommends Cater Allen who are part of Abbey National Business Banking and Bank Santander. They offer free business banking to clients of SJD and you only need a £1 to open an account. Of course you are entirely free to use any bank, but due to Cater Allen’s high level of customer service, good interest rates and most importantly their commitment to FREE business banking they are our recommended business banking partner.
4. VAT registration
WHEN: once you have formed your company
There are a two different ways to operate. One is the standard way, where you claim back VAT on items that you buy through your company - and the other is the option that most contractors take, which is to sign up to the Flat Rate VAT scheme.
It takes around six weeks to get your VAT number. During this time you’ll invoice your clients (we'll provide you with a template invoice) without VAT and when you are issued with your VAT number you can simply raise VAT-only invoices.
Most contractors choose the Flat Rate Scheme as, on the whole, you won’t be buying that much in the way of company related items and you will make more money by opting for the Flat Rate Scheme.
Administering your own Limited Company can be simple, efficient and inexpensive when you have the help of a specialist firm like SJD Accountancy, which is dedicated to contractors and freelancers. Most importantly, it ensures that you minimise the amount you pay in tax legally, so that you can retain the maximum amount from your contract.
If you have any questions about contracting or would like any further advice please call our New Client Services helpdesk on 0500 152500 / 01442 275789 or email michelle.turbutt@sjdaccountancy.com
Other useful pages, guides and case studies include:
Take home pay through a limited or umbrella company – The differences
Take home pay calculator - How much could you be taking home
First time Contracting or Freelancing? - A summary of the alternatives along with pros and cons
Step-by-step Guide to Contracting - Download a FREE copy of our guide
Limited or Umbrella? Can't decide? - We help you decide which is best
Guide to Contracting - All the best guides to contracting in one place
Umbrella company guide - Everything you ever wanted to know about umbrella company services
IR35 Guide - A great plain English guide to IR35
SJD Accountancy
SJD Accountancy are the UK's largest specialist provider of fixed fee, limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 11,000 clients.
We are the only National specialist firm of accountants with offices in all major UK cities so you’ll never be far from your accountant. SJD also have more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATII, ATT, ACCA, CA, ACA, FCCA, ACMA. You’ll also be pleased to know that we are one of the lowest priced as well.
Free face-to-face meetings. This is another unique service, only SJD offers free face to face meetings - tax is complicated and sometimes only a meeting will do.
Unlimited access to your own dedicated accountant. No call centres, no outsourcing, no automated call handling. Simply telephone, e-mail or meet your own dedicated accountant face to face.
Money back service guarantee. All your telephone calls and e-mails will be answered the same day or we will refund your monthly fee's.
Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market.
All inclusive low cost monthly package which includes completion of accounts, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, unlimited access to your accountant and all company returns. All this for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market.
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
If you have any questions about contracting or would like any further advice please call our New Client Services helpdesk on 0500 152500 / 01442 275789 or email michelle.turbutt@sjdaccountancy.com
