Talk to me about setting up your own Ltd Company...

[0l0dom0l0]

I've just got a job at Ford as a contractor .

In terms of pay, I have 3 options:

PAYE – The agency would offer a fixed term employment on a pay as you earn basis. The pay will be on an hourly basis, i.e. you will be paid for every hour worked subject to maximum hours set by the company or the client. Your gross pay will be would be subject to personal tax and NI deductions. Payment is made on a 2 weekly basis and would be subject to all timesheets being approved by your supervisor or client authorized signatory. Benefits are 26 days holiday + 8 bank holidays pa & SSP. (Statutory Sick Pay) These contracts will accrue statutory rights per current legislation.

Umbrella Company – An Umbrella Company works in a similar way except that the agency would pay the Umbrella Company the fully burdened rate, i.e. the PAYE salary plus any deduction that the agency would make to cover ENIC (Employers National Insurance Contributions and deductions to cover holiday pay and SSP allowances. – Under this situation you would be an employee of the Umbrella Company rather than the agent. Most umbrella companies have dispensations with the tax office where certain expanses may be claimed - these are deducted from your gross pay prior to the application of Tax and NI. They then deduct personal Tax and NI on the balance. Payment terms to Umbrella companies would be in line with any payment schedules supplied (2 weekly after a 4 week processing period).

Limited Company –This is where an individual sets up their own company and they are fully liable, for all tax, NI and any insurance liabilities, quotations are required to cover the services being supplied and a purchase order is issued to cover the service. Invoicing is a regular interval’s and payments will be made in line with any payment schedule supplied. Advice should be taken from a qualified accountant regarding taking this route

For the initial 6 months until the contract gets renewed on the 31st December I'm going to use an umbrella company as it's the easiest for the time being and still offers the good benefits of being a contract unlike a PAYE.

After that I'm planning to set up my own Ltd Company and employ myself as part of that company.

Anyone give me an idea of what's involved? And advice, hints, tips, experiences etc that would make it a bit easier to digest for me?

Thank you.

Dom
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[Kickstart]

Hi

It used to be VERY common for IT contractors. I did it for about 5 years, set up as managing director and sole employee of a limited company. Had various tax advantages.

However since about a decade ago the tax situation changed and it became difficult. It will cost you money to an accountant and the tax advantages are minimal these days.

Personally unless there is a real advantage to either ltd company or umbrella company (such as a major increase in pay) I would just go for the PAYE option.

All the best

Keith
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[The Shaggy D.A.]

Aye, I had a Ltd company for around 8 years as a contractor. Given the above options, PAYE.
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[0l0dom0l0]

There's a £5 an hour difference in pay for the PAYE option, hence the choice to try the other routes.
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Bikes: 2007 Derbi GPR 50, 1998 Yamaha Fazer 600 (written off), 2002 Yamaha Fazer 600, 1994 CBR 600F, 2003 Triumph Daytona 600, Kawasaki ZX6R J1.....Current: 2006 Yamaha FZ6, 1998 Suzuki TL1000R and a Honda VFR 400 NC30.

[Kickstart]

Hi

At a guess over 1/4 of that advantage will disappear just paying for the accountant (mine cost me £60 a month and that was 15 years ago), plus you will be liable for employers and employees national insurance. Further I presume you won't get any holiday pay on that setup.

EDIT - rough calculation. Say you get £20 per hour as a limited company and £15 per hour on PAYE for a 40 hour week.

The £20 over a year of 40 hour weeks is £41600. Say £70 a month for an accountant = £40760. Knock off the hours for 26 days holiday and 8 bank holidays = £35320. Not sure on employers NI contributions but seems to be between 10.4% and 13.8%. Say 10.4% for ease so £31646 left. Add in any extra company taxes and gaining no statutory rights and any benefit would be minimal.

All the best

Keith
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[unluckyluke]

Just a word of warning about going the ltd option. When I was contracting for smaller firms I was lucky if I got my invoices paid within 30 days (that usually involved bribing the people in accounts with cakes). When working for larger firms (especially someone as big as Ford) I would struggle to get paid for 60 days sometimes and no one seems to care if you get paid or not. Plus it's hardwork being your company employee working full time and your own credit control!

[Mark_F]

Depends on what you want to do. If you just plan on doing your job and that's it, PAYE. If you fancy doing the job and other work outside too, then LTD Co.

Assuming you'll just do the Ford job:

PAYE will net you a little less money overall than the other 2 (LTD Co offering the most, but not by a lot), however PAYE has the least hassle (LTD Co having the most hassle).

With Umbrella, factor in having to pay a payroll company just to get your wage. LTD Co you'll need an accountant (as others have said).

If you go PAYE (for the security of rights), you may find the fixed term contracts are set so as you won't get full employment rights anyway (though you still would gain some rights).

I personally stuck with PAYE as the benefits to the other 2 options are minimal IMO when considering the increased hassle, but I know others who feel differently (some being Umbrella, some being LTD Co, for various reasons).

[BrownTrousers]

As already said, PAYE makes most sense. Far less hassle and less legal responsibilities as well as some benefits (pension? Holiday pay? Redundancy pay /paternity leave /union help if applicable one day).
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[kitty kat]

Many years ago my (then) husband set up a Ltd company, he was the Director & I was the company secretary. He worked all day & I did the books at night when our daughter was in bed. It was a pain to do the books and then I had to get an accountant to audit them at the end of the year.
My present husband worked for an agency last year and he used an umbrella company, this out of the 2 was a better option as he only had to put his time sheet and any expenses in once a week, everything else was sorted by the umbrella company.

[BakesBeans]

Just bear in mind IR35 if you are only working at one place:

https://www.contractoruk.com/ir35/what_is_ir35_rules_explained.html
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[Nobby the Bastard]

[slowlydoesit]

There can be tax advantages to the limited company, but there are also constraints. As Kickstart says, you'll need an accountant to look after PAYE every month (at least until you're confident enough to do it yourself) and tax at the end of the year. Probably £500 a year or more.

If you want to reduce your tax bill, the usual route is to take a salary to no more than your personal allowance - which is usually £10k per year or £833.33 per month - and the rest in dividends, typically at the end of the year. Can you live off £833.33 per month?

You can pay dividends more frequently than annually (e.g. quarterly) but you need to establish whether the company made a profit, so you'd need to create quarterly accounts to prove that. You can only pay dividends if your company makes a profit and you must record the company's decision to pay a dividend and print/send a certificate for the shareholders.

This sort of setup will leave you with a very minimal tax bill up to about £38k pa.

None of it is unsurmountable or even necessarily difficult. On the other hand it is all additional time and sometimes worry, so it's a bit of a toss-up as to whether it's worth it or not. Some customers care about dealing with a "proper" company. And a limited company clearly separates your personal accounts from the company accounts, so if the company goes bust you have some protection.

I am undecided about the whole thing but will continue to use the limited company this year. At the end of it I'll do a full and careful cost/benefit analysis to see whether or not I should continue.
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[Nexus Icon]

I found it very easy to set up a ltd company about 15 years ago but, I warn you, it's a lot harder to convince HMRC that you've closed it again. I only used mine for 2 years, and closed it correctly, but it was nearly 5 years ago the last time I heard from the tax office demanding to see books, etc.
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[0l0dom0l0]

Some good advice thanks people.

I know a guy who runs his own Ltd company within Ford (so an umbrella company basically). It's pretty much as close to a Ltd company as you can get without running one and offers the advantages of claiming expenses back like travel etc at £0.45p a mile and this comes off the salary before the tax and NI is paid etc.

My dad is also looking at setting up his own Ltd company as he's considering doing some interim work etc of which I could be an employee.

PAYE is certainly the easiest but it doesn't maximise your take home which I'd like to do. I don't particularly mind about taking a bit of time here and there to do the accounts and not pay an accountant. PAYE also seems to remove the advantages of being a contractor as it doesn't give the flexibility with the tax options as umbrella or Ltd company does hence why I was thinking of that route.

Advice has been good so far, has anyone got more in depth info about the nitty gritty of a Ltd Company?
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CBT Passed: 30/08/2009, Theory Passed: 31/08/2010, Mod 1 Passed: 6/9/2010, Mod 2 Passed: 13/09/2010. Restriction ended 13/09/2012.

Bikes: 2007 Derbi GPR 50, 1998 Yamaha Fazer 600 (written off), 2002 Yamaha Fazer 600, 1994 CBR 600F, 2003 Triumph Daytona 600, Kawasaki ZX6R J1.....Current: 2006 Yamaha FZ6, 1998 Suzuki TL1000R and a Honda VFR 400 NC30.

[slowlydoesit]

[Kickstart]

[0l0dom0l0]

[Kickstart]

Hi

Not sure these days. With an umbrella company I presume you are liable for normal employee NI, and the umbrella company would be liable for the employers NI (which they would take from you), but this is very much a guess. There are different rules for self employed for all sorts of things, but I suspect that none of the options you have would come under the self employed rules.

Limited company wise the old fiddle was that you paid yourself a small salary and the rest as a directors dividend. Dividends don't attract NI. But there are various company related taxes.

You really need to speak to someone with a decent amount of experience in this.

All the best

Keith
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[0l0dom0l0]

[slowlydoesit]

[Cunnington]

I had a ltd company for a couple of years 6 years ago. I went through a business service provider who did the invoicing / PAYE bit and sent out all the stuff that had to be signed, which they then dealt with, for a fee.

I did it to control where I worked, never bothered with any of the expenses offset stuff because I didn't want to raise my head above the HMRC parapet. I went back on to PAYE because I wanted to move house and wanted payslips for my mortgage application.

What concerns me is that although what I was doing was within the interpretation of the rules when I was doing it, how would that interpretation change in 7 years time, which is apparently the length of time that HMRC can go back, and how much could they come after me for?

Being a director of a limited company, you are responsible for complying with your statutory duties. I was reliant on someone telling me what they were, and when I had to do it by. Just ask Gary Barlow what he thinks about his tax advice a couple of years back.
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[mentalboy]

I found the Ltd company a complete pain in the butt.
After you've set yourself up on PAYE (paperwork relating to which has to be kept up to date and submitted to HMRC on a very regular basis (when I was doing it 3 months, I believe it's now monthly)
Public liability insurance was much more expensive
As a self employed man I always did my own books but as Ltd you need an accountant to sign them off (and they charge more for Ltd's than self employed's)
And when you finally get paid you get hit for income tax and employee's NI and the company (Remember as a sole employee/boss, that's you!) pays employers NI
Materials and claimable costs for tax puposes were no different to either

I have never dealt with the 'umbrella' company's set up's so couldn't possibly comment on that (isn't that what's just accounted for Gary Barlow's recent 'problems'?)

So for me - self employed every time
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[gorillaonabik...]

There is some pretty misleading advice on here from people who do not understand the fundamentals. The advice I would give is to go either with an umbrella co or to explore the idea of being a sole trader. Reasons are:

1. If you set up your own, Limited company, you can save a ton of tax. The more money you earn, the higher the % of tax you can save, particularly when you learn all the arcane ins and outs of taxation.

For example, you are allowed, tax free, to spend a certain amount of money per director or employee on a Christmas party. I knew one chap who took his wife out to dinner, charged that back to the company as his personal Xmas party, claimed back the VAT and effectively paid zero tax and claimed VAT back. Subsistence, fuel, hotels, travel (fancy going on holiday and recovering any VAT on this) etc... were all elements where this individual successfully reduced his tax bill to zero, although he knew how to put accounts together at the end of the year.

His tax bill was almost zero, NI was zero but he was a smart guy (unlike me) and knew all the tricks.

2. If there is only one source of revenue going into your Ltd company and you are not employing anyone (and you get caught), you will lose all tax benefits, will pay tax as if you were an employee and maybe even be fined. Current legislation is focused on the idea that Limited companies should be for businesses, not individuals trying to find loopholes to escape paying tax.

3. Umbrella companies mean you will pay around 20% of your earnings to them and they take care of the rest. You will need to do some admin but essentially, they do it all.

In your case, with the small sums of money involved, the lack of 'multiple' likely revenue streams and I believe you do not understand the intricacies of accounts / taxation mean my gut reaction is the best course of action is to check the following:

1. Can you be a sole trader which will allow you to claim back tax?
2. Will an umbrella company be an option?

In your case, I would avoid a Limited company given the available information although I could be wrong. At all times, seek professional advice.
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[daffy]

if its with an agency paye all the way. you can claim for all the stuff you would with a ltd or sole trader but its much easier to do.

Working for an agency means you will not have a fixed place of employment. you can claim mileage and meal allowances, money for cleaning a uniform. i have done this and providing you keep a record in a dairy it will be easy to do.

avoid umbrella schemes like the plague. The only people to gain are the agency's for referring you to said umbrella company.
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[dydey90]

According to another thread on this forum, it seems that the right way to set up a ltd company is just to start advertising yourself, with a poorly made MS wordart/clipart flyer, then see if you can make a few bob and make sure it's a goer before you actually go through the hassle of registering the company.
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