Comprehensive FAQ List for Contractors
UK’s Most Comprehensive FAQ for Contractors thinking of going Limited
- Is there a best time to go limited?
- Is there a lot of paperwork?
- How long does it take to form a limited company?
SJD Accountancy, the UK’s largest specialist accountancy firm for contractors and freelancers, has released the UK’s most comprehensive list of frequently asked questions for contractors who are thinking of working through their own limited company.
The FAQ’s cover all areas of contracting and consulting such as whether to go umbrella or limited, how much you can earn as a contractor, what you can claim as an expense, how to form a Limited Company, what is IR35 and what insurances a contractor will need.
We have compiled this list after listening to the questions which contractors have asked us – and answering them of course – over the last 19 years!
How much can I take home as a contractor?
If you are a contractor working through your own limited company your take home will be anywhere between 75% - 80% of your contract value, for example:
| Daily rate | Take home |
| £200 | Between £150 and £160 |
| £300 | Between £225 and £240 |
| £400 | Between £300 and £320 |
| £600 | Between £450 and £480 |
Through an umbrella company your take home will be around 60% - 65% of your contract value. The two options therefore compare as follows:
| Daily Rate | Umbrella Company Monthly Take Home Pay | Limited Company Monthly Take Home Pay | Monthly Savings by Going Limited |
| £200 | £2,700 | £3,400 | £700 |
| £300 | £3,900 | £5,000 | £1,100 |
| £400 | £5,100 | £6,500 | £1,400 |
| £600 | £7,300 | £9,500 | £2,200 |
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 5 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 – 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:
- Step-by-step Guide to Contracting through your own Limited Company
- Guide to Contractor Expenses
- Plain English IR35 Advice
- Comprehensive Contractors Guide
- 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?
No, anytime 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. Typically if you are a contractor working through your own limited company your take home will be anywhere between 75% - 80% of your contract value whereas through an umbrella company your take home pay will be around 60% - 65%
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 employers 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 this results in a lower take home pay.
Additionally, as all accountants are governed by the same rules and regulations 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.
What is IR35 and what are it’s implications for me?
IR35 is much less of an issue than it first seemed. Basically it tries to differentiate between genuine contractors and “disguised employees”. It has been found that in the overwhelming majority of cases contractors are NOT “disguised employees”. Providing you have a contract that is outside IR35 (we can review this for you and confirm) - and your working practices reflect that of a standard limited company and not that of an employee - you will be fine.
Investigations into IR35 cases completed by tax specialists which the Professional Contractors Group works with (of which SJD is one) totalled 1,468 to December 2008. Of these, 1,462 were won by contractors and just six cases were won by HM Revenue and Customs.
If your contract and working practices give the impression that you are inside IR35 legislation, you will have to pay full tax and full National Insurance, instead of the usual salary and dividends from the profits of your company, as well as reduced expenses. This basically means that you will earn less money.
If I am inside IR35, is there any benefit in trading through my own limited company?
Even if your contract and working practices are inside IR35 you can still:
- Claim travelling and accommodation expenses
- Claim 5% of your turnover
- Benefit from the VAT flat rate scheme which, on an average contract, will save you around £2,000 a year
- Receive interest on the funds held within your own company.
So yes, from a financial point of view it still could be worth it. Also, any other contract work you do could also be put through your existing company.
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.
What insurances will I need?
You’ll probably need:
- Professional Indemnity Insurance which costs around £165 per annum. This provides financial protection for your company and is designed to meet the cost of defending claims made against you.
- Public Liability Insurance which costs £115 per annum. This protects you against third party claims for injury or damage to people or their property.
Both insurances are claimable expenses through your limited company.
How much does SJD Accountancy charge?
SJD Accountancy offers a complete limited company package which includes:
- Completion of accounts
- Payroll bureau
- Dividends
- Corporation tax computations
- Your personal tax return
- Free bookkeeping software
- Unlimited telephone access to your accountant, including face to face meetings and all company returns
This is all provided for a fixed monthly fee of £110 plus VAT, which is one of the lowest prices in the market. It is also, of course, a claimable expense!
Why should I choose SJD Accountancy?
SJD Accountancy is the UK’s largest specialist provider of fixed fee, limited company accountancy services to contractors and freelancer's. We are the only national specialist firm of accountants with offices in all major cities, are deemed PCG Accredited Accountants and are the chosen accountancy firm for nearly 11,000 clients.
We have been acting for contractors since 1992 and we are the most recommended accountancy firm on the Internet. We also have more qualified staff than any other specialist firm, with qualifications covering the following major tax and accountancy bodies; ATII, ATT, ACCA, CA, ACA, FCCA, ACMA.
SJD Accountancy have won numerous awards including;
- Best Contractor Accountants - Contractor UK 2011 - 2007
- Accountant of the Year - The British Accountancy Awards 2011
- Best Professional Team of the Year - UK Customer Experience Award 2011
- Customer Commitment Award - Institute of Customer Service 2011
- National Chamber of Commerce Award 2010
- Medium firm of the Year - Finalist Accountancy Age 2010
- Excellence in Customer Service - Finalists National Customer Service Awards 2009
- Sunday Times Best Small Companies - Award 2009 - 2007
- Small firm of the Year - Accountancy Age 2007 & 2004 and finalists in 2010 and all years since 2003
- Deemed PCG accredited accountants and fully MSC compliant
More importantly, in a recent survey 98% of our clients rated SJD as ‘better than other accountants’ – and we are working hard to convince the other 2%!
Am I tied into a contract with SJD Accountancy
No. There are NO entry fees, exit fees or tied-in fees.
How do I appoint SJD Accountancy
Appointing SJD Accountancy couldn’t be simpler and takes just 30 seconds! Either fill out our online client agreement form or call our Client Liaison Team on 0500 152 500 / 01442 275789. You can also e-mail Jaime at jaime.thorpe@sjdaccountancy.com
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.
We offer all clients:
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. And most importantly, in a recent survey 98% of our clients rated SJD as 'better than other accountants' - we are working hard to convince the other 2%!
If you have any question about contracting or would like any further advice please either contact your SJD Accountant or call our new client services helpdesk on 0500 152500 / 01442 275789 or email: michelle.turbutt@sjdaccountancy.com.
Appoint SJD Accountancy and never worry about your tax or accountancy affairs again!
You may also find the following pages, guides and case studies useful:
Take home pay calculator - How much could you be taking home
Contractor FAQ - All your frequently asked questions and their answers
First time Contracting or Freelancing? - A summary of the alternatives along with pros and cons
Choosing an accountant - For a full review
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 for you
Guide to Contracting - All the best guides to contracting in one place
Expenses Guide - Know exactly what you can claim
Umbrella company guide - Everything you ever wanted to know about umbrella company services
IR35 Guide - A great plain English guide to IR35.
