1. What do I need to setup my Limited Company?
Firstly you need to officially setup the Company. This
is usually known as ‘company formation’,
in which Danbro can assist you in forming for a small
fee of £85 + VAT.
You will need a ‘registered
office’ – this
is simply an official address to which official letters
can be sent and where certain records can be kept (It
is possible for you to use Danbro’s offices as
your registered office).
At least two ‘officers’:
This can be you and your partner, usually with you as
the director and your spouse as the company secretary.
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2. How will I be paid?
This really depends
on whether your income falls outside or inside of IR35.
Not
caught by IR35: We can advise you on a salary
to pay yourself, with guidance to the amounts you should
reserve for corporation tax, National insurance contributions,
PAYE tax, VAT and the remainder of company profits which
you can distribute in the form of dividends (dividends
are not subject to national Insurance).
Caught by IR35: All
company gross earnings (apart from the first 5%) will
be subject to PAYE (income tax, employee and employer
insurance), and you will be unable to distribute any
profits in the form of dividends.
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3. What is IR35?
IR35 is a term used to represent United
Kingdom tax legislation designed to tax "disguised
employment" at
a rate similar to employment. In this context "disguised
employees" means a worker who receives payments
from a client via an intermediary (intermediary being
their own Limited Company) and whose relationship with
their client is such that had they been paid directly
they would be an employee of the client. Before IR35
was introduced workers who owned their own companies
were allowed to receive payments from clients straight
to the company and to use the company revenue as would
any small company. Company profits could be spread
as dividends, which are not subject to National Insurance
payments. Workers could also save tax by splitting
ownership of the company with family members in order
to place income in lower tax bands.
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4. Am I caught by
IR35?
We have listed some points of thought, when considering
whether you are caught by the IR35 or not:
- Are your
working practices identical or similar to other employees
in the company you are at? If they are, then you are
likely to be caught by IR35 as you are not providing
a specialist/exclusive service, thus will be liable to
PAYE (Income tax, employer and employee
national insurances), and thus would not be able to take
a dividend (However,
an example of someone that does provide a specialist/exclusive
service may be an I.T technician contracted to work within
a telecoms organization on a particular project for an
estimated amount of time).
- Are you supervised or controlled
by the client (client being the CEO, or manager of the
place you work), in that the client can move you from
job to job due to changing priorities? If you are, then
it is a strong indicator of employment, thus you are
again caught by IR35.
If you are unsure whether you are caught by IR35 legislation,
we can asses your contract to clarify your current position. If you would like help with assessing your contract,
please contact the office.
Please click on the link for more information on IR35
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5. What if I am not caught by IR35?
You may benefit from
setting up your own Limited Company. It can be the most
tax efficient method of working, and as the director
of your own Limited company you are your own boss, which
provides flexibility in regards to working hours and
overall decision making. You can also issue dividends
to yourself, which are not subject to National Insurance,
thus your net income can be substantially higher than
working under an employer. You can also keep complete
control of your financial affairs meaning you do not
have to risk your money with any third party administrators.
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6.
What do I do with any official forms I receive?
From
time to time you will receive official forms from the
Inland Revenue, Companies House, or Customs and Excise.
When you receive one of these forms you should immediately
forward it direct to us.
The following forms are the most
common you are likely to receive:
- Certificate of incorporation
- VAT return form (VAT
100)
- Annual return (363s)
- Corporation tax return
- New company enquiry form (CT41g)
*If you receive any of the above, please forward the
forms directly to us immediately.
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7. What expenses can I put through the company?
When
you are a freelance contractor you will incur certain
costs. Some of these can be claimed before taxes are
applied - i.e. they are 'tax deductible'.
It is important
to realise that tax allowability and expenses are not
affected by your decision to operate through your own limited
company or an umbrella
company. The same tax
rules apply to everyone regardless of the payment structure
used.
You can treat certain expenses as tax deductible.
The
expenses for a contract not caught
by IR35 are as follows:
- Your
gross salary, which is usually low, allowing you to pay
yourself a dividend (dividends are not subject to employees
and employers national insurance contributions).
- Company
secretary’s salary
- Motor expenses (if the car is personally
owned)
- Accommodation and subsistence
- Telephone and business
calls only
- Books, magazines, subscriptions and courses – where
related to business and other contract work
- Pension
scheme where paid by the company to a HMRC approved
scheme
- VAT on expenses if your company is VAT registered
- Accountancy fees – if using a
limited company (for example, if you pay £130
per month for our service, it will be approximately £105
after tax relief)
- Bank charges and interest – on
your company bank account.
- Business insurances – professional
indemnity, business contents and other business related
insurances.
The expenses for a contract caught
by IR35 are as follows:
- Your
gross salary (this would have to be calculated in accordance
with the IR35 regulations
- Direct business expenses incurred
specifically in respect of the contract work.
- Travel
expenses (depending on the circumstances of the contract).
Any
business expense you incur should be entered into the
appropriate column of the spreadsheet that Danbro will
send you.
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8. What is PAYE?
PAYE is the ‘pay as you earn’ type
of income tax that must be deducted from wages and salaries
before they are paid.
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9. What is Corporation tax?
Corporation tax is a tax
payable by a company on its profits. Company profits
are simply defined as net sales less net expenses, and
are not affected by how much dividend is paid. Your company
must send the taxman a ‘Pay
and File’ tax return after each accounting
period.
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10. Do I need to register for VAT?
If your business satisfies
any of the following statements, your company needs to
register for VAT.
- If you’re taxable income in the
previous year exceeds £64,000
- If your taxable
income in the next 30 days is expected to exceed £64,000
- The
threshold to de-register (e.g. if your turnover goes
below VAT level) £62,000
- If you are currently
or planning to trade with suppliers in EU countries,
you are also required to register for VAT within 30
days.
You may be eligible to sign up with the flat
rate scheme, which enables a business to avoid having to
account internally for VAT on all purchases and supplies,
and instead calculates its net liability by applying
a flat rate percentage to the tax inclusive turnover.
The flat rate percentage depends on the trade sector
into which a business falls for the purposes of the
scheme. There is a wide spread of applicable percentages
ranging (on introduction of the scheme) from 5% to
14.5%. We will review your circumstances and calculate
whether you’re eligible to enroll
with the flat rate scheme. Please click on this link
for an example.
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11. What is the Companies House?
The company’s
house is a government agency that keeps details of every
single limited company in the country.
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12. Should I get
insured?
It’s recommended that you do! In the unfortunate
event of an illness, you must consider some of the following
questions: How will your bills be paid? Who will look
after your family?
When you are employed
in a regular job your employer may take care of some
of these important issues, however when your own boss,
you are your own employer – so
you must plan for illness, injury or death, as no one
else will do it for you. You may decide to take out Life
Insurance, which pays out a lump sum if you die; or Permanent
health insurance, which pays you a weekly ‘wage’ if
you are unable to work due to illness or accident.
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13. Do I
need a business account?
Yes, you must setup a business account, as it is in
fact illegal to pay business profits into a personal
account, as it can be deemed a form of tax evasion. It’s
also important to identify you personal monies from your
business monies. This is important as it creates transparency
in your business dealings to allow government departments,
creditors and auditors to accurately assess your business.
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14.
How do you calculate holiday pay?
Holiday pay is calculated at 1/12th of your total gross
earnings for the week or month.
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15.
How many holidays should i take?
It is your sole responsibility in the allocation of
holiday time from work. There will inevitably be times
when you need a break, or are between contracts, which
you must consider before setting up your own Limited
Company.
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