Thinking about or have made the decision to turn
self-employed? Read Nasa's Self-Employed Contracting
Guide...
Introduction
The purpose of this guide is to aid contractors who are
thinking about or have made the decision to turn self-employed.
Self-employment can be a frightening prospect for many or
considered too much effort and hard work, however this really isn't
the case and if you have found yourself in a position in your
working life where self-employment has to be considered, you really
should read on as this guide will hopefully tell you all you need
to know about self-employed contracting; the real negatives, the
real positives and all the bits and pieces in between!
We have provided information on all the options available to
hopefully help you in making a decision about how you are going to
operate as a self-employed individual. It is important to
also note that professional advice is useful at this initial, but
key stage in the process, as there are likely to be many questions
you need answering or guidance you may require. It's not
worth trying to take it all on yourself if assistance is available
from a trustworthy, reliable and inexpensive source - like for
example, Nasa Consulting!
First things first…
So, if you have finally made the decision to go self-employed,
you now need to think about which route you want to go down.
There are three main options for you to consider and your decision
should be carefully thought. Each option really depends on
your personal situation and lifestyle.
We have described the three main options below - hopefully after
reading, you will have an idea as to which one appeals the
most.
PAYE Umbrella Company
An Umbrella Company is basically a company (with the same legal
structure of a personal Limited Company) that acts as an employer
to self-employed contractors working under fixed term contracts and
usually via recruitment agencies. In essence, the Umbrella
Company will invoice the agency on your behalf for the work that
you have completed, the agency will then pay the Umbrella Company
who will in turn pay you a salary, obviously making the necessary
deductions for income tax, national insurance and associated taxes
plus their fee for the service. (Umbrella Companies pay you
through PAYE and you should receive a payslip from them in exactly
the same way as you would if you were in permanent
employment.) You also have the added benefit of offsetting
some of your income through claiming expenses such as travel,
meals, accommodation etc…
Sole Trader
A Sole Trader is basically a business that is owned and run by
one individual. It's as simple as that. You receive all
profits, obviously subject to the necessary taxes, but you also
have unlimited responsibility for all losses and debts. Every
asset of the business is owned by you but unfortunately all the
debts of the business are also your responsibility. As a Sole
Trader, you can use a trading name rather than simply using your
personal name if you prefer.
Limited Company
A Limited Company is a company in which the liability of the
members or subscribers of the company is limited to what they have
invested or guaranteed to the company. (If a Limited Company
has large debts, unlike Sole Traders, the members of the company
would not be personally liable for them.) Limited Companies
are usually limited by shares which means that they can be further
divided into public companies and private companies.
Ok, so now we know what options are available, let's look at the
negative issues of each of them…
Umbrella Company
- You lose control over your finances with an Umbrella
Company. You have no control over the processing of any
payments.
- With an Umbrella Company, you are essentially an employee of
that company so if you are looking to start a business with a view
to building on it and eventually controlling all of the day to day
aspects of your business - an Umbrella Company won't do anything to
support your future plans.
- You have to have trust in your chosen Umbrella Company as you
are essentially handing over your hard earned money and are relying
on them to pay your tax and national insurance contributions
appropriately along with ensuring you are paid efficiently.
Sole Trader
- One of the main disadvantages of being a Sole Trader business
is that you are ultimately responsible for your business and that
includes its debts. Your personal possessions could be at
risk if your business fails.
- It can prove difficult if you are trying to get work with large
companies as they seem to only like dealing with Limited Companies
due to the fact that one individual available for providing the
services is not appealing.
- As a Sole Trader, you have no one to share the responsibility
of running your business. This can add a lot of pressure at
times particularly if there are areas of your business that you're
not so good at and could use some support.
- Sole Traders tend to work longer hours and it can often be hard
to take time off for holidays or illness etc…
- Development of your business is going to be limited by the
amount of capital you have personally available so if you are
thinking about long terms plans to really expand and grow your
business, becoming a Sole Trader probably isn't the option for you
(although you could consider incorporating at a later date).
Limited Company
- Running a Limited Company for many is considered a headache due
the administration, accounting and form filling that comes with it.
Some contractors consider it to be a laborious and time consuming
process.
- Accountancy costs are more expensive when running a Limited
Company although more and more companies are competing for your
business nowadays so fees are coming down.
- Finding an accountant is, in itself, a difficult and daunting
task. There are many accountancy practices out there offering
very competitive rates so how do you choose an accountant that's
right for you? You have to put a lot of trust in an
accountancy practice so it's imperative that you choose the right
one.
- Limited Companies are apparently more strictly regulated than
Sole Trader businesses and information about the company is held
publicly and it is freely available to all.
- IR35 - the government's status tests can cause terrible
problems to small limited (service) companies and can be extremely
expensive should you be subject to an IR35 investigation. It
is important to review IR35 in detail as it is a tricky and complex
piece of legislation and many contractors don't understand it and
don't even know if it will apply to them or if it does, what the
consequences may be. It is important to learn about what
you're letting yourself into! (If you would like further
information about IR35, please click here.)
Don't worry, it's not all bad. Everything in life has its
down sides! Look at the positive elements below of each of
the options available - this (along with being aware of the
negatives) should hopefully give you a feel for which one is right
for you.
Umbrella Company
- The simplest, most hassle-free way of contracting - you can
simply do what it is you do best - your job, without the
administrative burden that comes with running your own Limited
Company.
- No responsibilities - all of the accounting and taxation
calculations are dealt with by the Umbrella Company.
- Saves time - particularly if you are contracting on a short
term basis, this is the only sensible option.
- Easy to set up - most good Umbrella Companies have streamlined,
online systems which make registering and administering your weekly
or monthly timesheets a piece of cake. You simply submit your
timesheet - the Umbrella Company will then invoice your agency (or
client). Once payment of the invoice has been made, the
Umbrella Company will pay you net of all tax, national insurance
contributions and the fee.
Sole Trader
- Sole Trader businesses are very easy to set up - you just need
to notify HMRC within three months of starting the business
- Start-up costs are usually low
- As the owner you have sole and full control over the
business
- Sole Traders do not have a huge amount of administration,
accounts or form filling to do, especially compared with that of a
Limited Company. You simply need to complete an annual
self-assessment tax return.
- All profits are the owners and your financial information is
not available publicly whereas Limited Companies have to file their
annual accounts with Companies House which can be accessed by
anyone.
- Sole Traders don't need to register a company as they can
simply use a trading name i.e. David Smith trading as DS IT
Systems.
- If you decide to get some accountancy assistance (which is
always wise) for Sole Traders, fees tend to be less as there is
less work to do with a Sole Trader than with a Limited
Company.
- Sole Traders tend to have a more personal relationship with
local people as you will know about the local market you are
working in.
Limited Company
- A Limited Company is a completely separate entity from its
members. With Sole Traders the individual and his/her
business is treated as one entity which carries a big risk.
With Limited Companies, everything relating to the business is
separated from you personally so you are protected if anything goes
wrong and the business fails.
- With a Limited Company, you will most probably pay less tax
than you would if working as a Sole Trader. As a Sole Trader,
your income will be subject to PAYE and NI contributions. As
a Limited Company you have the benefit of choosing to pay yourself
a lower salary and then a dividend payment.
- In certain situations, you may find that being a Limited
Company opens more doors for you. Many businesses prefer to
deal with Limited Companies and simply won't use Sole Traders.
- A Limited Company can issue shares of various classes which
means that you can easily sell stakes in the company or transfer
the ownership of shares.
- With a Limited Company, you can fund your pension (and any
other employees of the company) as a legitimate business
expense.
A few tips to take into account…
- Once you know which option you're going to go with, register
with HMRC without delay. If you don't register within 3
months of starting work, you will receive a whopping £100
fine.
- Be organised and record accurate records. HMRC make a lot
of their money up by charging penalties so don't give them the
opportunity!
- Get covered - ensure you have adequate insurance in
place. Employers Liability is compulsory if you take staff on
but you should also get Professional Indemnity and if necessary,
Public Liability too. These insurances will also help to
demonstrate that you are a genuinely business. (If you need
advice as to which insurances apply to you, please get in
touch.)
- Find a reliable and helpful advisor who will guide you when you
need guidance! There are many good business advisors and
accountancies in the market but some charge extortionate amounts of
money for it when others are happy to provide free advice.
What we can do for you…
At Nasa Consulting, we offer products and services to suit every
self-employed contractor. Below is just a quick overview of
what we offer but we pride ourselves on our excellent customer
service and if you need any advice or guidance please do not
hesitate to contact our friendly team of experts who are always
happy to help!
We offer:
- Umbrella Company - We can take care of invoicing your
agency/client, calculating your tax and NIC, processing your
expenses and arranging your agency contracts -all for £9.99 per
week.
- Contract and Working Practice Assessments/Status Checks - we
can assist you, when changing contracts in finding out whether or
not you should be classed as employed or self-employed
although HMRC also have a useful 'Employment Status
Indicator' test which can be used for free
http://www.hmrc.gov.uk/calcs/esi-01.htm.
- Self-Assessment tax return service - from just £99 plus
vat.
- Insurance - for an additional £3 per week (when taking out with
the payroll or umbrella service), we can provide full business
insurances should anything untoward happen while you are
contracting. You'll receive up to £10m Employers Liability,
£5m for Public/Products liability and £1m for Professional
Indemnity cover.
- Sole Trader Accountancy - if you would like assistance in
either setting up as a Sole Trader, or registering under CIS, or if
you're already registered and want help with the day to day tasks
such as Bookkeeping, Nasa can help. We offer a range of
accounting services for Sole Traders.
Summary
Now you know a little more about each of the options available
to you and their strengths and weaknesses, you perhaps need to
consider these things in line with your own personal requirements
and the lifestyle you lead and what you want for the future.
For example, if you like the security of permanent employment
and are most likely to accept a permanent position in the near
future, an Umbrella Company would be a great choice. They are
easy and very quick to set up, there is no hassle or
administration involved and there is also usually no fee to walk
away from it at any time (although please do check this with your
chosen provider).
Or, you may be really excited about your new self-employment
status and plan to continue working in this way for years to come
without necessarily having dreams of expanding or growing into a
bigger business very quickly. It may be a little overwhelming
to think about becoming a Limited Company at this stage but don't
want to rule it out. You may like the idea of getting set up
quickly without too much administration or hassle. If this
sounds like you, a Sole Trader business is likely to be your best
option. Don't forget, once you're on your feet, if the future
is looking bright and you want to grow you can always incorporate
at a later stage.
If on the other hand, you've really done your research and you
know exactly what you want out of life and where you want your
business to be in the next few years i.e. you have every intention
of growing the business and taking on more staff etc., a Limited
Company would definitely seem like the route for you. You
will also of course be in full control of your company's finances
and the shareholding.
If after reading this guide, you have some questions or queries
regarding your circumstances, please do contact us on 0117 904 7755
or email us at info@nasaconsulting.com.
Whatever you choose to do, Nasa Consulting wish you the best of
luck for your self-employed future!