Thinking of contracting

[contracting]

So I'm considering resigning from my job (permanent) to contract. I know I need to set up a limited company and a business account. I know I'd need an accountant!

have an idea of the daily rate that I could get.

I understand that it's usual to take a salary under the annual personal allowance and for the company to then pay dividends.

Can someone explain how I can calculate based on my day rate what my projected net pay would be? Typical contracts in my sector last for 6 mths and are often rolled over. Also how do deductions for NI work? Presumably I'd need to make allowances for this?

Many thanks

Your accountant should be able to help with some of that. They will also be able to advise you what expenses you can offset against your tax. You will need a business bank account- I would avoid HSBC but that’s due to personal bad experience. Depending on Turnover you may also need to be VAT reg.
Both me and DH are contractors within our own limited company
We take a salary to enable us to pay NI contributions and then take divis as well
You will need to watch out for IR35 though, especially if you hope to work in The Public Sector
We’ve been doing it for 5 years now so feel free to ask any more questions if I can help

Good rule of thumb is 25%.

That's really helpful, thank you.
So I've not yet got an accountant. Contractor friend has suggested one in London who will do everything but obviously charges! However former boss who contracts suggested local accountant (in Kent). He suggested I do my own invoices and just get accountant to "just" do tax year stuff. However as a potential newbie this makes me worried!

In reality how easy is it?

I do our invoices but apart from that the accountant does everything else and I’m happy to pay him to have less stress. We are in The North and pay about £1000 per year for them to do VAT, payroll, tax return, both personal tax returns and to answer any daft questions I might have. A good accountant will pay for themselves, when I first met mine I told him that I wanted to pay everything I had to but not a penny more and I think that’s what I’ve done so far.

You will need to watch out for IR35 though

Definitely this. You can take out insurance against this, my husband did. He did his own invoices but had an accountant for everything else. The accountant provided a specially set up spreadsheet he filled in every month that calculated his VAT, NI, tax etc. There is also Corporation Tax to take into account. You really need an accountant, even just for the first year.

Look at joining IPSE as well
And yes, take out Insurance in case you get investigated under IR35

Thank you. My gut feel was to pay for someone to do it & to do it properly. I don't want to be investigated!!
Time to make a phone call tomorrow.

Avoid the big London accountancy factories like the plague!
IR35 has made it very difficult to contract in the public sector through a limited company. Depending on your sector and anticipated day rate, you may be better off going through an umbrella company.
My take Home through ltd company was about 70%, through an umbrella it's closer to 60% but I am inside IR35.
A good recruitment agency will be able to give you some recommendations.
I couldn't be arsed to do my own accounts but in hindsight I probably could have done some of it. Corporation tax can be tricky to calculate though.

Thank you!

I do my own payroll and calculate and pay NI myself. I got someone on people per hour to do my annual corporation tax return for £160 and he answers my questions thoughout the year. There's other admin to do around this and it took a lot of reading and calculations to work out how much to pay myself etc (invoices, issuing p60s etc). It's complicated but now I'm glad I do it myself because I understand it and don't feel like I'm getting ripped of by accountants.

Use a local accounts that has recommendations
Avoid London ones - partly because they charge the earth and because you need regular face to face contact really
We got ours by asking around local business in our high street, and one firm got a lot of good comments, so we went with them

Accountants, not accounts 🙈

Just seen this thread. I've been contracting for over 12 years.

As far as accountants go I've never met mine all communication is done by email and rarely the telephone as apparently "contractors accounts are simple". I have a sibling an a few acquaintances who are accountants, but you never let someone you know do your accounts unless you want to spoil a relationship. (Yes you can use them to explain things to you after you have read HMRC resources and look over your accounts.) It is generally cheaper to use an accountant based outside London. Just ensure the person who overseas everything in the accountancy business is a fully qualified member of an accountancy body as an "accountant" is not a protected profession. Expect part qualified staff to do most of the grunt work like payroll.

I suggest you use online book keeping software and ensure you keep your accounts up to date as the accountant can (and will) charge you extra if your accounts are in a mess when it comes to submitting your accounts for corporation tax.

It is also wise to ensure you have a basic understanding of what they do and ensure they don't leave things to the last minute, as other contractors I'm in contact with have had their accountancy practice sold and the new owners made lots of mistakes.

Also get someone different from your accountant - whether an IR35 reviewer or a lawyer - to check your contracts particularly where recruitment agencies are involved for clauses that would fail IR35 at least. Ideally you want them to check for other unfair clauses but only a lawyer is qualified to do this. Recruitment agents lie a lot but frequently company staff don't tell them the truth.

And get IR35 insurance. IPSE provide it if you are a member. There are rumours that HMRC are more likely to quietly drop a case if the person is defended by IPSE.

Unless you've got plenty of time to do your own research and are good with numbers/details, then definitely get a good accountant on board now to guide you through the formation/setup and start you on the right road with accounting software etc. It'll pay dividends in the long term.

Yes, people can and do "do it yourself" but it's not for everyone, especially those with limited time, not good with numbers/detail, not good at researching for themselves, etc.

Muddling through and getting an accountant for the year end potentially means you missing out on tax saving opportunities. I've had loads of clients do that and have ended up paying more tax then they needed because they missed some basic/simple set up opportunities that they simply didn't know existed. These aren't fancy tax avoidance schemes, they're simple things like paying themselves the "right" wage through payroll each month, getting the timing of dividends right, judicious use of directors loan accounts when there are good reasons to do, voluntary VAT registration, appointment of spouse as director and/or shareholder etc., knowing how to get more expenses legitimately allowable for tax. I find it very annoying when clients come after the year end and I see just how badly they were set up and how much tax they could have saved.

Likewise, using a poor or unqualified/unregulated accountant is also false economy. I've just got a case on my desk now where a average-earning contractor has ended up with a tax bill of close to £50,000 mostly down to him using a "cheap" execution-only year end accountant who wasn't properly qualified/regulated. He only appointed them for the year end work, they did the bare minimum for a cheap fee. He clearly didn't do the research, he didn't really know what he was doing, likewise the "accountant" didn't do anything more than putting numbers in boxes so the returns would be filed. No one did any tax planning - now it's too late and he has to sell his flat to pay the tax he could have avoided had he got a proper accountant to plan it through properly.