Basically, you must use your skills, experience and judgement to make the company a success. You are responsible for filing returns to Companies House and checking that your tax, VAT and National Insurance Contributions are recorded, prepared and paid to HMRC on time. Don’t worry, your dedicated Danbro team will help with all these things.
As a director and employee the company can pay you a salary. As a shareholder you can also be paid a dividend. You decide how much you take unless your contract income falls within IR35, in which case you follow HMRC’s ‘deemed salary’ calculation.
Again, your personal accountant will help ensure you maximise your tax efficiency and get the most out of the work you do.
Any money you make belongs to the company and not you, so you’ll need a company bank account for which you will have full control.
Which bank you use is entirely your decision. If you’d like to, you can apply for the Cashplus Business Account, with our banking partner Advanced Payment Solutions Ltd. Their low cost account is an alternative to high street business banking and can be set up easily online.
When you are operating your own business, you’ll need to consider whether you need, or are indeed required, to take out any business insurance policies such as professional indemnity, public liability, or employers’ liability.
You should review your new contract as this may stipulate a minimum level of insurance cover required to fulfil the contract.
As a client of Danbro, we can provide you with these policies for £25 per month (plus Insurance Premium Tax), please contact us on 01253 600 150 for more information.
Danbro Accounting Ltd is an Appointed Representative, for General Insurance Business, of Jelf Manson, part of Jelf Insurance Brokers Ltd.Registered and authorised by the Financial Conduct Authority (FCA), Reference No. 302751. Not all products and services are regulated by the FCA.
Operating your own limited company allows you the opportunity for tax planning to minimise the amount of tax you have to pay, and your personal Danbro accountant will discuss all these opportunities with you.
Both options offer their own advantages depending on your circumstances and requirements.
If you’re uncertain as to which option is best for you then simply give us a call on 01253 600140, and our friendly team will help you find which of our services is the best fit for your circumstances.
As Danbro provide both limited company services and an Employment Umbrella Solutions, you can be assured that you will be given unbiased advice as to which option is for you.
At Danbro, our services offer you the choice of spending as much or as little time on admin as you prefer.
By choosing our Plan One you can prepare your own professional invoices, record all out of pocket expenses and upload company bank statements easily and conveniently using FreeAgent online accounts.
If paperwork and admin are not for you, have a look at our alternative plans that can remove this burden from you.
When operating through your own limited company, you’ll incur expenses that will generally fall into two types, those incurred in performing your contract, e.g. travel, and those incurred to administer your company e.g. accountancy fees.
It is most likely that those incurred in performing your contract will be made out of your own pocket and will need to be reimbursed from company funds.
An expense claim, detailing each expense, will need to be completed to support this payment to yourself.
As a client of Danbro, you’ll be provided with an expenses guide to highlight the most common expenses that can be incurred by your business and to ensure expenses are claimed correctly to avoid any potential personal tax charges.
You can simply choose to leave your company dormant, in case you decide to go back to contracting, or close your company down.
If you chose to close your company down, Danbro will assist you with this process at a small additional cost.
A dividend is a slice of a company’s profit that is given to the shareholders, which will be yourself if you operate your own limited company.
Dividend income you receive will not be subject to National Insurance contributions and the first £2,000 per annum will be tax-free. Dividends above this level which fall within the basic rate tax bracket will be taxed at 7.5%, and if they fall into the higher rate tax bracket they will be taxed at 32.5%.
When forming your own limited company, you will be appointed as director (and employee) of the company and will be responsible for managing the company affairs.
The company will pay you a salary for acting in this capacity. You will also be the owner (shareholder) of the company and will receive dividend income from the company’s taxed profits. The frequency and amount of this dividend income is decided upon by the company’s director(s). All the cash held in the company bank account legally belongs to the company; the finances of the company are separate to your own personal finances. You can extract funds from the company by a combination of the following:
Salary – as an employee, a net salary is paid after Income Tax and NI deductions.
Dividends – paid to you as a company shareholder.
Expenses – you can claim your allowable business expenses.
Each year, the company will have to pay corporation tax on its profit where profit is calculated as the total amount of sales income earned less any business expenses incurred.
As a director of a UK limited company, receiving dividend income, you will more than likely have to complete a personal tax return each year. Danbro can assist you with this return. In calculating your personal tax liability, you will probably have to pay additional Income Tax on your dividend income.
Here at Danbro we understand that not every client needs exactly the same degree of service, so we provide a range of services to suit your needs.
All fees are fixed and agreed in advance, starting from as little as £85 plus VAT per month.
The Intermediaries Legislation, or IR35 as it is more commonly known, is the single most important tax law affecting you as a freelance contractor.
The aim of IR35 is to prevent an individual, who would ordinarily be viewed as an employee, from offering their services through a limited company in order to avoid paying Income Tax and National Insurance Contributions.
If you as an individual enter directly into a contract with an employer, you will receive a salary that would be subject to Income Tax of up to 45% and National Insurance Contributions of up to 12%.
Where a limited company enters into the same contract then the tax rules are different. A limited company will not be viewed as receiving a salary. It will make a profit on which it will pay business tax of only 19% and most importantly it will not be subject to National Insurance Contributions at all.
To prevent every employee from setting up their own limited company in order to avoid National Insurance and the potentially higher levels of tax, this is where IR35 steps in.
If certain conditions are met under IR35, then the earnings of the company are considered to be a ‘salary’ on which Income Tax and National Insurance Contributions are payable.
1. An individual performs services for a client.
2. These services are provided under a contract involving a limited company.
3. If the services were provided under a contract directly between the individual and the client, the individual would be regarded as an employee of the client.
Conditions 1 and 2 will apply to all contractors providing their services through a limited company. It is point 3 that creates the uncertainty in deciding whether or not to apply IR35.
One exception to these conditions is in relation to being an ‘Office Holder.’ By simply being an office holder of your end client, IR35 will apply; there’s no need to consider condition 3.
Whilst IR35 itself is a tax law, in order to determine whether or not to apply IR35 you need to understand employment law and establish if you would be regarded as an employee of the end client in the absence of your limited company (often referred to as ‘disguised employment’).
Unfortunately, to make matters worse, employment law does not provide a distinction between employment and self-employment, leaving you to rely upon past judgments in common law to reach your decision.
In determining the status of an individual as employed you would need to establish that all three prerequisites of employment status are present. These would be that:
1. You are required to provide the service personally.
2. You are subject to Supervision, Direction or Control over the manner in which the work is performed.
3. There is a mutual obligation of both parties; your employer is obliged to provide work and you are obliged to make yourself available to do so.
For IR35 to apply you need to be regarded as an employee of the end client. So conversely to be outside of IR35 legislation, you need to show that you are not an employee of the end client.
This is not the same as showing you are self-employed; although being able to demonstrate you are in business on your own account is always regarded as the best option.
Behave like a business – you need to differentiate yourself from the actual employees of your end client, beginning with the contract you sign and how you act on a day to day basis.
Review your contracts – do not sign a contract until you have taken professional advice and are satisfied with the IR35 terms and conditions.
Collect evidence – keep records of particular events which demonstrated how you acted differently from an end client employee e.g. during an IT failure you went home and received no pay, when all employees remained.
Market your business – choose a business name (don’t use your own), create your own logo and business stationery, and sell your services via your company website.
Understand the business sector – take advice to ensure that you’re aware of any special rules that may apply in your sector which mean that IR35 automatically applies.
Your decision to operate through an umbrella company should not be made purely on the basis of IR35.
Operating through your own limited company can be more rewarding, flexible and better financially even though you need to apply IR35 to your first contract.
Remember the conditions needed for IR35 to apply are based upon a contract and not your limited company, so during your contracting life you may find that IR35 applies to some contracts and not others.
If IR35 applies, your company will have to pay Income Tax and National Insurance Contributions that it would not otherwise have had to pay.
As Income Tax and National Insurance Contributions are more usually associated with a salary rather than business income, IR35 includes a calculation to convert contract income into a taxable salary amount known as a ‘deemed salary’.
For IR35 purposes, expenditure falls into three categories:
1. General administration expenses (Private Sector only)
An allowance equal to 5% of the total IR35 income is deducted rather than the actual cost incurred. This allows for the general expense of running a business, such as accountancy fees and marketing costs.
2. Other expenses – including travel & subsistence
These are expenses which you could have claimed as a deduction if you had been directly employed by the client. For example, travel costs between workplaces, professional subscriptions and professional indemnity insurance are all allowable deductions.
Note: operating under IR35 will mean that your workplace is no longer considered temporary and as such, home to work travel is not allowable as a deduction.
3. Capital Allowances
You’re only allowed to make a deduction for capital allowances where the plant or machinery bought is necessary for the performance of the contract within IR35. Examples include the cost of a computer or laptop.
This may be easier to explain with a simple example.
Peter is an engineering consultant with his own limited company, PEC Limited, who completed a Private Sector contract to which IR35 applied. The income received from this contract amounted to £60,000 and Peter incurred £1,000 in travelling between workplaces whilst fulfilling this contract. In addition, PEC Limited paid £250 for professional indemnity insurance, £150 for Peter’s professional engineering subscriptions and paid £5,000 into a pension for Peter.
The deemed salary calculation is as follows:-
A. Contract Income £60,000
B. Company Administration Allowance (Calculated as 5% of contract income) £ (3,000) (Private Sector assignments only)
C. Costs incurred in performing the contract (e.g. travel between workplaces) £ (1,000)
D. Allowable costs paid to an employee (e.g. professional subscriptions) £ (150)
E. Business Insurance Premiums £ (250)
F. Payments made to an approved pension scheme £ (5,000)
G. Subtotal £50,600
Nearly there; the figure in subtotal G represents the ‘deemed salary’ plus the associated Employer’s National Insurance.
H. Employer’s National Insurance £ (5,089)
Deemed Salary £45,511
So from a contract income of £60,000 a gross salary of £45,511 must be declared and the associated Income Tax and National Insurance paid by the company to HMRC.
Note: don’t forget that the Employer’s National Insurance of £5,089 is also payable to HMRC.
Off-Payroll Working in the Public Sector
Whether an assignment is classed as within the public sector is determined by the Freedom of Information Act 2000.
We have listed some examples of public authorities below, but further information can be found here.
Some examples of public sector bodies are:
Government departments, executive agencies and non-departmental public bodies
Police and fire authorities
Educational establishments including universities
Bank of England
It is worth noting that if you work for a charity who do work for the public sector, the changes will not affect you.
Similarly, if you work for a private sector company who have secured a contract in the public sector, this does not necessarily mean that the reforms will affect your assignment.
If you’re unsure, you should speak to your agency or end-client.
If you are assessed as within IR35, the key change will be that Tax and NI will be calculated and deducted by whoever pays your invoice, and you will receive a net salary into your limited company. Additionally, you will no longer be able to claim Travel and Subsistence expenses.
These changes will apply to all payments made after 5th April 2017, even if the work was completed before.
If you’re deemed to be within IR35, the best route for you will depend on your personal circumstances.
You can continue to work through your limited company but the things to consider are:
Your agency or end-client must allow payment via a limited company.
You won’t be entitled to the 5% allowance to cover the cost of running your limited company.
All your contract income will be subject to Tax & NI and you’ll receive a net salary into your limited company.
Depending on the length of your public sector assignment, you may want to consider the following:
1. If you perform a mix of public and private sector assignments or operate public sector assignments that are less than three months
If you already use Danbro for your accounting needs and want to work on a short-term assignment in the public sector, you can keep your limited company in a dormant state for free until you return to the private sector. We’ll put your accountancy fees on hold while you use our Employment Umbrella.
Instead you will pay a weekly or monthly Employment Umbrella margin.
2. If you only work on assignments in the public sector or your assignment will last longer than three months
In this instance the best option may be to switch to an Employment Umbrella.
For a weekly or monthly margin an Employment Umbrella will take care of your administration and make sure that you’re paid promptly, whilst also providing you with all the benefits that come with employment, such as:
Statutory Sick Pay
Maternity or Paternity Pay
Our solutions also include:
Access to our BUPA Medical Cash Plan for you and up to 4 of your children*
Personal Accident Insurance
Professional Indemnity £5,000,000**
Public/Product Liability £5,000,000**
Discounted Self-Assessment Tax Return for any other income streams
Access to a free consultation with Danbro Financial Services
*Please be aware that this is not a contractual right and at our absolute discretion we reserve the right to terminate participation in the scheme, to substitute another scheme, or alter the benefits available to you under any such scheme. You can only become a member of this scheme if you are aged 18 and over, and are a UK resident
**Some exclusions may apply
If you intend to use an Employment Umbrella for a short period of time before opting for a private sector assignment, you can keep your company in a dormant state.
If you use Danbro Accountancy, we will place your accountancy fees on hold during this time.
If you don’t think you’ll continue to trade through your existing company for the foreseeable future, it may be best to close it down altogether.
In this instance a company closing fee will usually apply.