Making the leap into contracting can appear daunting at first, but what do you do once you’ve made that all important decision to become a freelancer? There is an endless supply of extensive guides and fact-sheets available. Here are our top tips for getting started.
When it comes to actually forming a company there are two ways in which to operate, Limited or Umbrella, and both have their advantages and disadvantages.
Forming a limited company is an easy process, and can sometimes be included within your accountancy fee’s (if offered). It also allows for the most tax efficient way of paying yourself and is best recommended for contracts which are longer than 3 months.
When you have formed a limited company, the financial risk is significantly lower than other ways of trading due to the company being a separate legal entity to you. Alongside this you are in complete control of your business, and do not need to liaise with any third parties in order to be paid, like you would with an umbrella – but we’ll get to that.
Working through an umbrella is most recommended for short term contracts (1 to 3 months), and can be a good introduction to working for yourself. However, they aren’t the most tax efficient way of operating, as most umbrella companies take a slice of your pay, NI contributions and any tax before receiving your ‘salary’. This is similar to how a PAYE scheme works.
Operating through an umbrella does also unfortunately mean that you have a lack of control of your finances, as your earnings go through a finance team before you see them. Where as forming your own limited company serves as an element of professionalism and status to your business.
There are various ways to choose from however, Limited or Umbrella are the most popular ways in which to operate. To help guide you through the process, Nixon Williams has created this infographic to illustrate which way would best suit your business needs. To view the full infographic please click here.
Forming your Company
Once you have made the decision to become a contractor, your next step is to decide which way you wish to operate. In order to work as a contractor or freelancer, you are legally required to register a business with Companies House.
Setting up your business can be done in a variety of ways. You could form your company yourself. However, for new contractors this can be very confusing, as you’ll need to register with the relevant authorities etc. Alternatively, you could appoint an experienced accountant who will take care of this for you.
For more information on what is involved when forming a limited company, view our first timers page on company formations here.
For new contractors, utilising the experience of an accountant can be gold dust. Accountants will help you get a better understanding of how your accounts should be filed, but more importantly, let you focus on your contract.
To put this in perspective, if your hourly rate is £100, and your accounts roughly take you 2-3 hours a month to complete, you are effectively costing yourself £200-£300. Managing your own accounts also add a greater level of risk for errors.
Whereas, a specialist accountancy firm may charge around £100 for a month, which covers all your accounting needs. With the added reassurance that there is a specialist taking care of your business finances.
So, can you afford not to have an accountant?
About the Writer:
Rachel Smith is a technical writer for Nixon Williams, a specialist contractor accountancy firm with 20 years experience, serving the needs of contractors and freelancers alike.