If you’re looking to make the switch from full-time salaried employment or are an umbrella company contractor seeking to form your own limited company, now could be the perfect time to make the change, ensuring you are fully prepared to hit the ground running in 2014.
The UK economy has largely stagnated and stuttered since the global financial crisis, but the country’s gross domestic product recorded strong growth in the second quarter of 2013 and all expectations are that this will also be the case in Q3 and Q4 this year.
As a result, limited company contractors may find that they have a much more stable economy to contend with at the beginning of next year.
What’s more, the government’s Budget for the 2014 tax year revealed that an allowance of £2,000 per year for all businesses and charities can be offset against their Employers’ National Insurance liabilities.
While there is plenty of time for the concession to be tweaked to ensure contractors are not eligible, as it currently stands, all businesses will qualify – even limited companies listing the contractor as the sole employee.
One of the major benefits of operating as a limited company is the ability to determine your own level of salary and withdraw additional funds from the company in the form of director’s loans and dividend payments. This is perfectly legal and reduces the amount of income tax and National Insurance you are required to pay.
It is not yet clear how this provision will work for those who take small salaries from their companies to reduce this burden, but contractors who operate this way are more likely to receive a financial boost over salaried employees.
Before you can form a limited company, however, you must determine your position in terms of IR35 legislation. Whether you fall inside or outside of this legislation hinges on the definition of ‘self-employed’ used by HM Revenue and Customs (HMRC) and although this is not readily available, it is generally thought that you will be encompassed by the ruling if you are told when, where and how to complete a contract by a client.
If this is the case, you will be unable to operate as a limited company contractor and should instead consider utilising the services of an umbrella company.
However, if you are free to decide the location, hours and how to carry and deliver the scope of work agreed under your contracts, you will be free to set up a limited company and should register it with Companies House.
Setting up a limited company is really easy especially if you use the services of a formation agency or an accountancy provider. Once this incorporation process is complete, you will be sent a Certificate of Incorporation, which will include a CRN number – something Companies House will ask you for in all future dealings, including when sending accounts.
You should then inform HMRC of the date you created the company, its name, the CRN number and the sector you will be operating in. HMRC will then issue you with a Unique Taxpayer Reference, as well as details on how to set up an online account for your Company Tax Returns and instructions for paying Corporation Tax.
It will quickly become clear that there is a significant amount of admin that must be completed when operating through a limited company and in order to ensure you are prepared for 2014 and beyond, it is a good idea to enlist the services of an accountant, which will also be able to assist you with bookkeeping and your accounts.