How to pay yourself
If you are contracting in the UK, you may be facing two different financial situations.
- Working through a limited company: You will be paying yourself a monthly salary.
- Inside IR35: If inside IR35, you only have to pay yourself a deemed salary.
Operating PAYE means that you won’t have to worry about income tax and NI contributions. These deductions will be automatically made once your accountant processes your payroll.
Claiming expenses is easy when you are working through a limited company. You can claim all business expenses just like any other business, including business equipment, training, and other costs. On the other hand, contractors inside IR35 will only be able to claim a 5% allowance in lieu of business expenses.
Those working through limited company and outside IR35 will probably be using dividends to move profits from their company to their personal account.
As a limited company, you will be submitting your first year-end accounts after 12 months of company formation. You will be liable and responsible for submitting annual returns. You can make it easy by hiring an accountant who does it all for you.
You will also need to use self-assessment to pay off your personal tax liabilities. Remember, you will have to submit self-assessment by 31st of January each year to stay out of trouble.
A umbrella company will remove all these issues for you
Insurance for contractors
Contractors can protect themselves from accidents or other disastrous events at work using various insurance policies. Majority of these policies will also cover claims for negligence thus protecting you from frivolous suits.
Since contractors provide professional advice to their clients who then rely on that advice and may even change their business plan based on it. If things don’t work out, there may be financial loss that your client has to bear. In such cases, your client may decide to sue you for financial damage caused by your advice.
Having professional indemnity insurance can protect you against such legal actions. Moreover, this will indicate that you have a professional attitude towards your work, which can help you find more work in the future. Majority of providers offering these policies have created number of cost-effective and hassle-free policies to make life easier for contractors.
Should I hire an accountant?
Since you are going to be responsible for day to day administration of your company, you may need to hire an accountant to manage accounts on your behalf. You won’t need an accountant if you want to take care of accounts by yourself (whatever the reason).
Typically, an accountant will help you with number of things including payroll, PAYE, processing NI contributions, invoices, year-end accounts, taxation, VAT, and general tax planning. You will also get full assistance with P11D, P60, and P35 forms, which are often a headache for contractors.
Although accountants charge a varying fee depending on location, nature of engagement and other things, these charges usually remain between £100 and £150 per month. Some accountants may have additional fee that may be hidden in form of ‘extras’. Make sure you are closely looking at that before hiring an accountant to know the actual cost you will be bearing.
Contractors usually try number of different accountants before settling down with one of them. This is only natural as different accountants may offer different advantages and contractors may have to switch accountants at some point to get more value out of money they pay to their accountant.
For umbrella company contractors, there is no need to hire an accountant other than personal tax returns that you will be submitting at the end of the year. Ideally, your umbrella provider should be able to recommend a quality accountant for that.
Managing Timesheet and Invoices
One of the things you will be doing as a contractor is to fill in timesheets and send them to the client in time. You will provide all the work details in this timesheet so that your clients will know about work hours during the week. Usually, timesheets are sent once a week but different arrangements can be made depending on the nature of work.
There is no restriction on timesheets being paper-based or online. However, online timesheets are easy to manage which is the reason majority of clients will prefer it. Online timesheet can also help with automatic invoice creation.
For majority of agencies or clients, contractors may have to send their invoice along with timesheet. The invoice will provide all the details of total amount due as well as VAT. If you are working through a larger contracting agency, you may never have to create an invoice as they will automatically create invoices for you as soon as they have verified your timesheets. This helps to speed up payments procedures, removing all the annoying delays.
As a contractor it is your responsibility to keep timesheets and invoices updated. You should send them to the client/agency in time as agreed. In case you are operating through a limited company, you will be your company’s finance director, thus taking all the responsibility for invoicing and other financial matters. If this seems too much of a problem, you can simply join an umbrella company and let it do all these administrative tasks for you.
Can I get a mortgage?
If you go to lenders, majority of them would require you to provide one year of accounts in order to be considered for a Contractor mortgage. This can make things tough for contractors who are looking to get a mortgage quickly.
You can easily get a mortgage (income based) without having to provide any past accounts. We can help you find a mortgage with your current contractors. Even if you need to remortgage, we can help you with that. With rates starting as low as 2.9%, you can easily re-arrange your mortgage with a lender that we arrange for you.
To learn more about mortgage, simply read our mortgage advice page. Make a list of things you need to apply for a mortgage and then complete the form below to get started.