The nature of work is changing and, for many people, so are the ways in how they work.
The positive view is that this makes the workforce more agile and adaptable. The negative is that it is creating a sense of precariousness and uncertainty.
Whether people choose to become freelance contractors, or are forced to adapt to these circumstances, there are ways in which they can structure how they manage their work, as Mike Keeling, Operations Director of One Click Group, explains.
“If you’re a contractor, however much uncertainty you face in winning and maintaining work, a structure underpinning your business can offer a greater degree of personal reassurance.”
There are two options which work best for contractors looking to give themselves a firmer business structure:
- The limited company
- The umbrella
The Limited Company
“Setting up as a limited company as a contractor is tax efficient. You pay yourself a basic salary, and the rest you can draw down as dividends, allowing you to maximise income.”
For sole traders to do this, however, they must also register as a company director. This comes with certain financial and statutory obligations, including registering at Companies House and ensuring that they can meet HMRC’s tax deadlines.
“There is flexibility and freedom as a company director, but there is also a considerable administrative burden where there are time consuming tasks such as submitting annual accounts, plus greater administrative costs”
It is more likely that a sole trader’s affairs will become more complex should they choose to set up as a limited company.
“It’s sensible to want to maintain flawless records anyway, but as a limited company you have no option but to comply, or else risk fines and penalties. And your business affairs are far more open as your accounts will be on the public record.”
Limited companies can benefit from lower rates of Corporation Tax, but only if their profits are sufficiently high.
The Umbrella Option
There is an alternative available to contractors, which still gives their business a robust structure, but does not involve the same degree of personal involvement in administering it.
“In an umbrella company, as a contractor you become, in effect, an employee, while still maintaining your independent status”
“You arrange the client you’re working for to pay your earnings from them into the umbrellas scheme. The scheme then deducts your tax and contributions and gives you a salary.”
It offers administrative ease to contractors and takes the hassle out of looking after their finances.
“It means you don’t have to commit to becoming a limited company, but you still get the benefits of a proper business structure underpinning your earnings, and you don’t need to worry about the admin side of things. It’s especially good for people with short-term contracted work.”
Depending on the nature of work they are involved in, there are different umbrellas options for contractors, including PAYE and CIS for people working in construction and related industries.
“The key thing for contractors is that there are options to explore and that they don’t need to face a binary choice between simply being a sole trader or registering as a limited company”
Contractors must also be clear about HMRC’s IR35 legislation. This is designed to crack down on contractors who are, in effect, acting as hidden employees.
One Click Group has produced a Complete Guide to IR35 Legislation, designed to help contractors and hirers gain a full understanding of the legislation, and how it affects them.
If you are a contractor and want to discuss options for choosing the right business structure for you, please contact One Click Group, by calling 0345 557 1287 or visiting oneclickgroupuk.com.
