Contractor’s Guide to Moving from Permanent to Contracting
Moving from permanent to contract often means a higher take-home pay, which is only fair considering the benefits contractors have to give up. Whatever your reasons for moving from permanent to self-employment, there are some key considerations to make before committing. This step-by-step guide will tell you how to find contract roles, what to look for in a contract, as well as giving details on the various ways to operate – i.e. how to actually take home an income from your contract.
- How to find a contract when moving from permanent to contract
- Operating through a limited company vs umbrella company: IR35
- How to set up your limited company (IR35 status, appointing a specialist accountant, opening a business bank account, and registering for VAT)
How to find a contract
The demand for contractors, freelancers, interim managers and consultants will always be high. Corporates and even government agencies are turning to this highly-skilled and mobile workforce to perform tasks and manage projects. Contractors and interim managers offer far more flexibility and are a lower long-term cost option, compared to taking on permanent members of staff.
Finding a contract is really no different to changing jobs. You’ll need to make sure your CV is fully updated and then target recruitment agencies which specialise in your particular field.
Ways to operate - limited company or umbrella (and the perils of IR35)
Click the following link to review our comprehensive comparison table which indicates the differences between working through your own limited company or through an umbrella company.
IR35 will play a part in determining which structure will be most beneficial to you. If you are outside IR35 and intend to be contracting for over three months, you will benefit from the tax planning opportunities related to working through a limited company. This simply means you will be responsible for a slightly higher amount of monthly administration (our contractor clients spend an average of 15-20 minutes per month on this) when compared to working under an umbrella company.
Working under an umbrella company means less take-home pay, but as an employee of the umbrella company – IR35 does not have any bearing on you. If you are outside IR35, you are not obliged to operate under an umbrella; it remains your choice.
In summary, choosing a limited company structure means a higher take home and increased administration, while choosing to work under an umbrella affects your bottom line, but removes the need to consider IR35.
Many contractors are choosing a blended approach when it comes to business structure to remain flexible regardless of an assignment’s IR35 status. With the majority of our packages, we provide margin free umbrella employment as standard, meaning you can seamlessly switch between limited and umbrella with no need to change your accountant.
IR35
IR35 was launched by the government in order to stop staff moving from permanent to contract in the same company. This move saw 'contractors' retaining the same benefits, risks and working practices as an employee, as well as being able to take advantage of the tax reliefs and benefits of working through their own limited companies.
Providing you take the necessary precautions (such as ensuring that you meet all of the conditions in your contract) required to stay outside of IR35, and your working practices reflect the contract, you have very little to worry about.
Moving from permanent to limited company contracting – a timeline
If you choose to operate through your own limited company, you need to be aware of what you need to do and when you need to do it.
Administering your own limited company can be simple, efficient and inexpensive when you have the help of a specialist firm like Caroola, which is dedicated to contractors and freelancers.
Most importantly, it ensures that you minimise the amount you pay in tax legally so that you can retain the maximum amount from your contract.
1. Establish your IR35 status
WHEN: Before you sign your contract
As soon as you find a contract and you have accepted it, try to establish whether the contract is outside IR35 (sometimes called IR35 friendly) or inside IR35 (caught by IR35).
Even if your contract is inside IR35, in financial terms it may still be worth working through a limited company. Until April 2021, you will only pay employment tax and National Insurance on 95% of your contract income (rather than 100% if you work through an umbrella company) – this is known as the 5% allowance.
After April 2021, the only contractors that will still benefit from the 5% allowance are those working for small companies (within the small companies’ exemption). You will also still be able to enjoy the benefits of the Flat Rate VAT Scheme as a limited cost trader.
The Flat Rate VAT Scheme is an incentive provided by the government to help simplify taxes. It means you charge VAT on your invoices at 20% but only pay back 15.5% of the gross amount in your first year and then 16.5% in subsequent years.
This provides the following additional income (based on a 45-week working year):
- £200 per day contract - £1,710 extra profit per year
- £350 per day contract - £2,992.50 extra profit per year
- £600 per day contract - £5,130 extra profit per year
Unsure how to make the switch from permanent to contracting?
1. Appoint an accountant
WHEN: Ideally before you form your company, they can advise you on many important facets of company set up, VAT registration, director responsibilities etc.
Take-home pay, dividends, expenses, profits, salary, benefits, personal allowances, tax planning. You are likely to have 101 questions, and your accountant will be able to answer them all, guiding you on the most tax-efficient way to operate your limited company. Find out more about what an accountant can do for you.
Caroola offer a complete fixed fee package including free company formation as well as:
- Completion of accounts
- Corporation tax computations
- Dedicated accountant
- Payroll bureau
- Personal taxation
- Company returns
- Dividend handling
- Free book-keeping software
2. Form a limited company
WHEN: Ideally when you appoint your accountant between one and two weeks before you sign the contract. Of course, it can be done on the same day if necessary but doesn't give you much time to consider the options.
Forming a limited company online is very quick. You will need your limited company name, certificate of incorporation and company registration number before you start work, as the contract will need to be in the name of your company. If you form a company using Caroola’s online service, you will have all of these within 48 hours of forming - though Companies House processing the application. Alternatively, you can call us on and we are happy to do it for you over the phone.
If you want to use the formation only service we offer, then you will get same-day formation, a company bank account, VAT/PAYE registration and advice on share structure.
Free company formation comes with all of our accountancy packages, which are some of the best value for money, fully inclusive fees in the market. There are cheaper ones out there but they very rarely include everything you need.
3. Open a Business Bank Account
WHEN: Typically, businesses have a 30-day payment term for settling invoices. So before you raise your invoices you need to have a business account set up.
As a limited company, your business is a separate entity so if you want to get paid you’ll need to include your business bank account details on your invoices. You cannot raise an invoice in your own name - it must be in the business name.
If you form your company with Caroola, we will send you an application form for a business bank account. Opening the account will take a few days.
4. VAT registration
WHEN: Once you have formed your company
There are two different ways to operate. One is the standard way, where you claim back VAT on items that you buy through your company - and the other is the option that most contractors take, which is to sign up to the Flat Rate VAT Scheme.
It takes around six weeks to get your VAT number. During this time you’ll invoice your clients without VAT (which you can do through our online portal). When you are issued with your VAT number you can simply raise VAT-only invoices.
Most contractors choose the Flat Rate VAT Scheme as, on the whole, you won’t be buying that much in the way of company-related items and you are likely to benefit by opting for the Flat Rate Scheme.
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