Starting up a business?

Working as a contractor, freelancer or consultant can be very appealing. But before you get going, there are important decisions to make. Accounts Direct are specialist accountants for contractors, freelancers and consultants. If you're starting up your own business, we can help you every step of the way.

 

Deciding on the structure of your business will ultimately decide how much you pay in tax, and how much of your profit you keep. Accounts Direct will proactively help you choose the path that leads to optimal tax and National Insurance results for your business.

 

What are the options?

 

When starting out as a contractor, freelancer or consultant, there are two main choices:

  • Limited company. Liability of members and shareholders is limited to their investments.
  • Sole trader. One person owns and run the business.

 

We’ve simplified the pros and cons, below.

 

Limited company

Sole trader

You must adhere to the Companies Act. This means:

  • Keeping account of records
  • Auditing accounts with turnovers in excess of £5.6m
  • Making your accounts available to the public. This includes filing accounts and an annual return with the Registrar of Companies
  • Maintaining statutory books

You do not legally have to file accounts with the Registrar of Companies. Of course, annual accounts still must be filed for Inland Revenue tax returns.

You’ll likely have greater potential to borrow finances. You can use current assets as security by creating a floating charge.

Borrowings can be as high as you like, but you are not permitted to create floating charges.

Shares are usually transferable, therefore company ownership is easily changed.

No shares to transfer.

There’re credibility and kudos in having an officially-recognised company, and in being a company director.

No such prestige.

You will be taxed monthly via PAYE. Higher rate tax, if applicable, is paid by shareholders on dividends.

Tax is generally paid in instalments every six months or quarterly.

You losses can only ever be brought forward, and levelled by future profit.

Your losses can be set against the current year’s income or carried back to previous work years.

Profits of up to £300,000 are charged at 20% (2012/13).

If you earn in excess of £42,475 per annum you’ll be taxed 40%. Over £150,000 per annum is taxable at 50% (2012/13).

National Insurance for employers and employees is payable on the director’s salary.

Class 2 National Insurance is paid at a flat rate of £2.65 per week. Class 4 NI of 9% is paid depending on your income.

 

 

Paying tax and National Insurance

 

When you’re contractor, freelancer or consultant, your tax and National Insurance Contributions will differ, contingent on how you set up your business.

 

Sole trader

 

  • Must pay income tax on profits- 20%/40%/50%
  • Must pay Class 2 and Class 4 National Insurance contributions (NIC)
  • Must inform and register with HMRC
  • Must complete tax return
  • Must pay National Insurance contributions

 

 

Limited company

 

  • 20% Corporation Tax on profits
  • Tax implications on company profits extracted
  • Must pay secondary Class 1 contributions
  • Employees’ salaries and employers NIC tax deductible

 

Next Step:

Please contact us if you need further advice, have any questions about our services, would like a free consultation.

Speak to us today. Call: 0333 5775332 or Email: info@account-direct.com

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