# Setting up Ltd company for contracting work



## Shug (Jul 13, 2007)

Just had an interesting call with a recruitment agency during which they mentioned I'd need to set up a Ltd company, or use an umbrella company in order to get paid, rather than by PAYE.
Its an IT gig for minimum of 6 months. Never been asked re a ltd company for contract work before. Anyone in IT know if this is normal? Or done it before?
Possibility of other contracts along same lines (so I've been told) in same sector so it probably wouldn't be a one off. But then is it wise to set out on own like this when I'm in a pretty secure permanent job just now? (but thats another matter altogether, even if I would get a years salary in 3 months...)


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## bigmc (Mar 22, 2010)

Set yourself up as a plc, make yourself director and pay yourself minimum wage, then pay yourself the rest of the money you earn as directors dividends. You can keep working in your ft job too if they're flexible enough to let you.


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## Shiny (Apr 23, 2007)

You'd still be on PAYE as an employee of a Ltd company though, although you will be paid by your Ltd Company rather than by the company supplying the work or the Employment Agency.

I would ask the Employment Agency to be a bit more specific as their requirements and then have a word with an accountant as to the best way to go forward.

A plc is a bit extreme though  at this stage, you don't want to be paying shareholders just yet i'd have thought.


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## jcp (Oct 2, 2010)

Ltd company , you have to do your books and invoicing , umbrella management company does that for you , you'd still be paye with the umbrella managment company but you get to claim work expences . its less hassle with the umbrella company and they pay your tax and ni , its more money in your pocket being ltd , depends how much you enjoy book keeping , alot of the employment agencies that deal with driving let you go self employed . it saves them money . just remember you dont get holiday pay or any other perks of being employed


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## organgrinder (Jan 20, 2008)

This is a mine field at the moment (and you'll lose more than a leg if you get it wrong)

I'll not scaremonger but i'll just set down a few of the facts and the impact of certain tax cases recently:

If you run a one man service company (a company in which the shareholder is the main earner through selling his personal services through his company to a 3rd party) then you will be subject to the IR35 rules. If you fail the IR35 test then you will pay tax and both employees and employer's NI on 95% of the company's income - you will get none of the benefits of withdrawing dividends which are (or should I say, have been) NI free.

To ensure you are not caught by IR35 you should have your contract reviewed by a specialist and amended as necessary. The biggest problem with this is that the agency will not want to change the contract but you need to insist. A specialist I use will review the contract for about £250 and for a further £280 - £350 will provide full professional assistance with any HMRC enquiry into your affairs and will also cover the cost of any additional tax you may have to pay. These guys are the leaders in this area and have well over 90% success rate. There are a couple of other conditions but I can give you details if you wish.

Another common practice with One Man Service Companies is to have half the shares owned by the wife and pay her dividends which usually results in a saving of higher rate tax for the couple. This was the subject of a long running case which HMRC lost, so they changed the rules and it is no longer possible unless you wish to risk losing both an arm and a leg.

Basically if you have a service company now, you should be receiving a commercial salary for the work you undertake from your own limited company and if there is anything left, you can take the balance as dividends. Obviously the "commercial salary" can taken at the bottom end of the range to leave the maximum available for dividends but you should be aware that there is a new (from last year) box on the tax return which asks how much of your income you received in dividends and salary from a company in which you are a shareholder and also provide your personal services through the company. At the moment, the concensus between accountants I have spoken to is that if your salary is not at least 50% of the total income figure than you will be more likely to be chosen for enquiry. The smaller the percentage of salary the greater the risk.

Employment related securities legislation was introduced back in about 2005/6 and it contained some real nasties: if HMRC believe that dividends received by someone are only received by reason of their employment (and not because they received them as payment for risk capital as would be the case in a plc) then they can apply PAYE and NI to those payments. This is all tied up with the commercial salary etc and HMRC have started to win the cases they have brought recently.

Get the proper advice, have a water-tight contract and don't try to push the envelope too far - the Government need money just now and those they consider are evading tax or avoiding it in an unacceptable way will be hit hard.

Finally IR35 is on the list of things to be looked at by the Government and they have given assurances that it will be reviewed but they have also said that it may be a few years before changes are made so in the meantime, beware!

Sorry for the rant but I am just back from an all day tax course.


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## The Cueball (Feb 8, 2007)

organgrinder said:


> Sorry for the rant but I am just back from an all day tax course.


Must have been a good 8 hours kip then...



:thumb:


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## organgrinder (Jan 20, 2008)

The Cueball said:


> Must have been a good 8 hours kip then...
> 
> 
> 
> :thumb:


Unfortunately I am one of those sad people that likes tax, so I stayed wide awake!


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## The Cueball (Feb 8, 2007)

organgrinder said:


> Unfortunately I am one of those sad people that likes tax, so I stayed wide awake!


Knew there was something wrong with you 

Can I have your notes please...... 

:lol:

:thumb:


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## organgrinder (Jan 20, 2008)

The Cueball said:


> Knew there was something wrong with you
> 
> Can I have your notes please......
> 
> ...


Nothing wrong with me or at least nothing that isn't wrong with all accountants!

I also have boxes full of notes - you are welcome to look at them any time you want.


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## rinns (May 24, 2008)

organgrinder said:


> This is a mine field at the moment (and you'll lose more than a leg if you get it wrong)
> 
> I'll not scaremonger but i'll just set down a few of the facts and the impact of certain tax cases recently:
> 
> ...


Bloody hell that sounds just like the preachings of HMRC.

Was thinking what if I got a job contracting with HMRC ? How would that work out. Would they let me rewrite the contract to protect myself from IR35..........


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## Shug (Jul 13, 2007)

Hmmm, sounds like it may be more hassle than its worth. 
Although the salary would be considerably more than I'm on now, it would involve 127 mile commute or stay during the week and to say the missus wasnae thrilled would be an understatement. Coupled with the extra hassle and costs due to the above, think I'll be giving this a miss. (why can't the oil industry base itself nearer edinburgh! :lol
Thanks all for the help tho!


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## rinns (May 24, 2008)

Its not for everyone, but I more than doubled my income going contracting thus allowing the wife to stop working.

she was more than happy with me staying away 2 nights a week.

If your lucky you may even be able to work from home on some contracts. I do 2 days a week.


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## Guest (Oct 21, 2010)

This is normal for IT contracting. I did it myself in the early-mid 00's. The idea is to remove liability from the company your are contracted to. 

As has already been said, beware IR35. I used to be the case that contractors would pay themselves minimum wage and take the rest in dividend payments and thus significantly reducing tax payments - IIRC, you only paid capital gains and not PAYE (employers and employees) and NI. This is why IR35 was brought in.

If you have multiple simultaneous contracts, you should be ok. But a single one and you WILL get "caught". 
Essentially, all it means is that under IR35 because you only have one contract you are really no different to an employed person and hence are subject to the same tax rules i.e. you will pay full PAYE on everything you take as income from your own ltd company. The painful bit is that you also pay employers income tax as well, with was around 12% when I was contracting.

Before IR35 and the IT bubble bursting, contracting was pretty lucrative. Putting at least twice what an employed person, doing the same job, in your pocket was a minimum expectation. However, there was no sick pay, pension, holiday pay etc. You also need to employ an accountant to prepare your books for Company's House. You'll also probably need to submit VAT returns every quarter.

Now, you need to look very carefully at the rates you would be getting. Assume you'll pay full PAYE plus employers income tax. Factor in the cost of an accountant and loss of benefits that a normal employee would receive (pension, holiday/sick pay, bonus, medical/life ins etc). 

To my mind, the rates I see advertised don't make it worth it at the moment. In fact, I think I would be worse off, but my field of expertise is real time embedded systems which is probably at the lower end of the IT pay scale.


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## organgrinder (Jan 20, 2008)

rinns said:


> Bloody hell that sounds just like the preachings of HMRC.
> 
> Was thinking what if I got a job contracting with HMRC ? How would that work out. Would they let me rewrite the contract to protect myself from IR35..........


There are still a lot of accountants that take the view that minimum salary/maximum dividends are OK but they are in for a rude awakening. I would rather tell my clients to keep their heads just below the parapet rather than ignore the risks and have them picked off by the army of snipers HMRC has sitting there.

As of April next year all compoany accounts and Tax Returns must be submitted in iXBRL format which will let HMRC build a database of performance statistics for every type of business in every part of the country and also compare one company from year to year.

In the future if your company's performance falls outwith the parameters set by the average or is greatly different from last year, then you will get an enquiry. It will all be automated.


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## JoeNobody (Feb 21, 2010)

You could go the Umbrella Company route. Saves all the hassle of tax, IR35, etc. Ok, it's not the most tax efficient way to contract, but the rates should still mean a healthy pay packet at the end of the month.

I did a 4 month contract that was a 220 mile round trip, daily, and it was about the limit of what I'd do - mostly all motorway so about a 2 hour drive. I don't know if the tax relief stuff is still the same as it was back then (this was early 2006), but I was able to claim relief at 40p per mile for the 1st 10K miles, then 25p after that. I was also able to claim for a hire car for 1 month. This more than covered the costs for a 3 month lease on a diesel Astra. I did do the final month in my S3 though, which hurt a little.


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## slim_boy_fat (Jun 23, 2006)

A LOT of guys who did offshore contracting [and to a lesser extent in the building trade(s)] fell foul of IR35 regs, mainly I think because they were contracted only to one employer.

Cost some of them shedloads of money which thye'd already spent......


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## Shug (Jul 13, 2007)

Just looked at an umbrella company and their basic calculator shows that assuming gross year income of 71 grand, I'd take home 48 grand. (thats after a pension contribution as well, and including mileage)
Using a tax site calculator thats exactly the same as if I was earning 71k in a normal permanent full time job. So I guess its accurate?
Might see if there's scope for compressed hours or remote working at all. Might be worth it after all.


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## organgrinder (Jan 20, 2008)

I wouldn't touch an umbrella company with a barge poll. The very term umbrella company means unacceptable tax avoidance to HMRC and they have closed many of them down. The rest are in the firing line.

Get the contract reviewed if you are going to consider this route and get some kind of guarantee which is backed up by substance.

One man service company's can and do work and give a flexibility you don't get when you work for someone else but they have to be structured properly and have the correct contracts.


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