Accountancy services for freelancers & contractors

More and more people are becoming freelance workers. In many occasions this is following a restructure in the organisation in which they previously worked resulting in redundancy and then working for them on a freelance basis. When doing this freelancers must consider the implications of IR35 and ensure compliance.

If you need help developing a contract to reduce the risks of non compliance to IR35 then contact us.

Should I set up a limited company as a freelancer?

Most freelancers set up their own limited company or become self-employed. Other options include use of an umbrella company or an agency.

Set out below are some of the issue to consider when becoming a freelance worker for each of the options;

1. Your own Limited Company

Most freelancers work through their own Limited Company.

Through Companies House you can set up your new business having checked that your chosen name can be used.

Having a limited company means that you are running your own business and will have complete control as the company director but also responsibility to meet the legal obligation of the organisation. Some of these are Filing annual returns and annual accounts with Companies House and filing corporation tax returns with HMRC along with PAYE monthly returns.

This option is the most tax efficient way of working as you keep more of your income through a combination of salary and dividends as a shareholder.

However the company in the eyes of the law is a separate legal entity to you and therefore the bank account, funds and other assets are not yours but the companies. With new companies this can cause some problems in getting bank accounts and loans through the banks as the business has no credit history.

You as a shareholder will have limited liability in the event that the company is unable to meets it’s debts and goes into liquidation. This liability is limited to the value of shares you hold.

2. Sole Trader/ Partnership

These are both forms of self employment. A partnership just means that two or more people own the business.

To become self employed you will need to contact HMRC and apply for a unique tax reference (UTR). This number identifies you to HMRC as self employed and you will be required to file annual self assessment each year.

The main differences to a limited company are that you are one legal identity and therefore liable for any debts in your business, the amount of tax burden is usually higher, however there are far fewer legal obligations and your business affairs are kept confidential.

3. Umbrella Company

Some freelancers who are only working for short periods or do not want the hassle of paperwork and the responsibility that comes with running their own limited company will choose an umbrella.

The financial returns by trading through an umbrella will be much less, particularly if you are outside IR35.

Joining an umbrella means you become a PAYE (Pay As You Earn) employee of the umbrella. Your client or agent enters a contract with the umbrella for your services and you enter into a contract with the umbrella.

An umbrella company therefore provides a ready made invoicing vehicle for freelancers whilst also removing the administrative duties normally associated with working in the form of a Personal Service Company. The Umbrella Company normally issues invoices on the freelancers behalf, collects payments from clients/agencies, calculates tax and N.I contributions and pays the freelancer their net pay direct to their personal bank account.

The benefits therefore are that it is very easy to use, you simply send in your timesheet and expense details and wait to be paid. The downside is that you won’t keep as much of your money with an umbrella as running a limited company and you are reliant on that company collecting your money from the client or agent and then paying you.

Traditionally, Umbrella Companies were more expensive than running your own Limited Company, mainly because their charges included all the administration overheads, and they tended not to offer the same tax advantages. With the introduction of IR35 the tax disadvantages of Umbrella Companies have been reduced however.

4. PAYE through the Agency

Some agencies allow you to become “PAYE” through their own payroll service.

This is the least tax beneficial option available to a freelancer as you pay full tax and national insurance (NI) contributions on all your earnings.

In addition, this option does not allow you to claim valid business expenses which would help to reduce your tax and NI liabilities.

Which tax solutions are best for freelancers?

Hopefully this has given you some advise and understanding of issues to consider when going alone.

Please feel free to contact us for more information or find out how we can help you set up and manage your business.