Contract work- what are the advantages of setting up your own company/ incorporating yourself?

Question

I live in the UK, work in the IT industry, and have recently started working as a 'contractor' in my own right for the first time.

Over the last few years, I have had a few 'fixed term contracts' with different companies, but in each of these cases, I have become an employee of that company, whether it has meant working directly for them, or for one of their clients at the client's site. With the job that I have recently started, I am now legally speaking 'self-employed', and will invoice the company for whom I am doing the work for 'services rendered' at the end of each month, rather than being paid a salary.

I understand that this has implications on a few aspects of my life, such as the fact that I will now have to pay my tax and NI contributions myself, rather than having them automatically deducted from my pay through PAYE. Are there any other things that I should be aware of/ will need to take into consideration with respect to how I am paid?

When previously working for a consultancy firm at one of their clients' sites, I was part of a team that included a number of people who were 'contractors', and they had mentioned that they incorporated themselves- this is now something that I am considering, since I am now technically 'self-employed'.

As I understand, incorporating yourself can be advantageous in terms of protecting your personal assets from any liability, as well as having tax benefits... But I have no idea about whether it is worth doing, or how to go about it if so.

What are the pro's and con's of incorporating yourself? Are there particular circumstances where it would definitely be best to do so/ not to do so? How can I decide whether it is right for me?

Answer 1

UK IT contractor here...

You have 3 options:

1. Go Limited
2. Go umbrella
3. FTCs

Going Limited has its perks. You take a cut of the VAT as profit, can offset expenses at source, minimal overheads. However, you will need an accountant for your annual returns (personal and company) and that can be expensive. If your income before taxes is less than £40k, this is not worth it. There are some hefty upfront costs involved too (a few hundred pounds), and you will be responsible for invoicing, managing a relationship, marketing yourself, etc.

Umbrella is basically "Limited Light". All the perks, less paperwork. You are an employee of the umbrella, you pay PAYE, and the umbrella handles the rest. As thiese are percentage based, they're fine up to £40k, after that, go limited. As with Limited, you are running the business and have to handle things.

FTC contracts are the other way of operating. These can be good, but consider that the employer has to do the leg-work, and you cannot expense anything. As a result, you will earn less.

Personally, going Limited was great for me. Others I have worked with have headed back to being permanent or FTC employees after a year or two.

Answer 2

You might find this useful.

https://www.incorporate.com/how_to_incorporate_yourself.html

Personally, I would avoid being salaried in any way, and work on an invoice basis. This enables you to remain 'the boss' in where and how and when you work, and to make some decent money. The ideal is to be able to charge thousands of pounds for a day or twos work.

This is not always possible depending on the sort of contracting you are doing. But being a contractor is not quite the same as being a freelancer IMHO. Either way, in my experience, as a sole trader, or a LTD company, has never had any affect on how people view my business. I used to think that being a LTD company and being VAT registered would improve my ability to apply for the choicest roles, but in reality it had absolutely no impact whatsoever. After all, it is all just a paper shuffling exercise about how you arrange your tax affairs.

What really made a difference, was when I employed a team of people and could sell the team and it's combined abilities. But if you are not in that situation, then no amount of paper shuffling is going to change the fact that you are a one man band. So don't try to hide it, make it an advantage, make it the reason why people should choose you, make companies and their overheads seem cumbersome and overloaded, whereas you are fast, flexible and dedicated to your customers cause.

As for protecting yourself, you need a good contract, watertight terms and conditions and liability insurance. I would feel naked without these and vulnerable.