First timer's guide to contracting

If you are thinking of moving from permanent employment to contracting, there are two different options for you to consider: limited company or PAYE umbrella. We have summarised the alternatives along with the pros and cons of each option.

There are two main options for contractors to manage their earnings:

Operating through your own limited company

 You will become a director of your own company and be responsible for all tax contributions and relevant paperwork. If you're earning over £25,000 and keen to make a career of contracting, this could be the best option for you

Although many new contractors find the idea of running a limited company for the first time daunting, help is at hand. Administering your own limited company, with the support a dedicated firm of accountants like SJD Accountancy, is simple, efficient and inexpensive.

Contracting through your own limited company does require a little more work than using an umbrella company. You will firstly need to form a company, which will just take five minutes. You can form your company and check name availability by clicking the link, open a company bank account (we can help with this), get help from your personal accountant to manage your month on month finances and from time to time send cheques off to the Revenue, again we will help you to understand exactly how much to send.

You will typically take home around 75% - 80% of your contract by working through your own limited company.

Advantages of contracting through a limited company

  •  The most tax efficient way of working, meaning you will take home more money (as much as £15,000 more on a £350 daily rate compared with using an umbrella company)
  • Claim a wide range of expenses - accountancy fees, equipment, software etc.
  • Access to the Flat Rate VAT scheme.
  • Even if inside IR35 it may still be worth it, call us to find out by how much (01442 275789)
  • You keep complete control of your financial affairs meaning you do not have to risk your money with any third party administrator
  • Running your own business isn't difficult; especially with help from a fully qualified accountant to support you

Downsides of contracting through a limited company

  •  There is a certain amount of paperwork involved, usually about 10 - 15 minutes per month
  • Your company accounts will become your sole responsibility
  • Your contract may fall inside IR35, which can incur greater tax and National Insurance contributions 

Contracting through a PAYE umbrella company

If you choose this route, all of your income tax and National Insurance contributions are paid on your behalf. This may be the best option for you if you earn under £25,000 and are taking a short term contract of fewer than 3 months.

Contracting through an umbrella means that you become an employee of the company. When you join, your client or recruitment agent enters a contract with the umbrella for your services, and you enter into a contract with the umbrella.

You'll typically take home around 60% - 65% of your contract by working through an umbrella company.

If you are considering this route, our sister company Parasol can provide the help and support needed to understand this in more detail.

Benefits of contracting through an umbrella company

  • Very easy to use, you simply enter your timesheet and expense details and wait to be paid
  • All tax and NI is deducted before you receive your money, so you will have no further taxes to pay
  • You can benefit from employment rights such as sick pay and pension contributions

Downsides of contracting through an umbrella company

  • You will receive a salary that is subject to full PAYE Tax and NI, it's just like being a permanent member of staff again
  • You are reliant on the umbrella company to collect your money from the client or agent and then to pay it on to you

Advice from SJD Accountancy

If you have any questions about contracting or would like any further advice please call our new business team on 01442 275789 or email newbusiness@sjdaccountancy.com.

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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 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your Emails received by 4pm on any normal working day will be answered the same day. Should it be necessary to leave a telephone message it will be answered same day/following day latest or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new business team on 01442 275789 or email: newbusiness@sjdaccountancy.com. Our new business team is open Monday to Thursday (8am to 8pm), Friday (8am to 7pm) and Saturday (10am to 4pm)

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.