When I first got started as a contractor, I wanted to make sure that I was set up in the best possible way to make sure my taxes were covered, I was legally protected and I was getting the most out of the money I was earning. This can be confusing, time-consuming and it is very difficult to know whose advice to trust.
Here’s a few things I’ve learned along the way that I hope will be of help to others. This advice is obviously very UK-specific, so if you’re elsewhere, this post may not be all that useful to you.
1 - Get an accountant
This is the best piece of advice I could give anyone starting out on their own. A good accountant will help to save you significantly more than they will cost you each year, and more importantly they can save you from getting yourself into hot water. Whoever you speak to might also contradict some of the other things I’ve learned below, but that is okay, as everyone and every company is different - what suits me may be wrong for you.
Speak to an accountant before you make any decisions about how to structure your new venture, including whether or not to become a limited company, whether to register for VAT, and so on.
2 - Limited companies are very tax efficient
A lot of freelancers and contractors operate as self employed, this is because it is simpler and cheaper to operate. You don’t have the overhead of running a limited company, or the cost that comes with accounting for one. However, it can be very worthwhile to take that overhead on.
Becoming a limited company can offer you some big tax efficiencies, including:
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Directors Dividends - As a director in your limited company, you can pay yourself up to ~£37,500 from your profits (after Corporation Tax) without paying any personal tax on it.
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Personal Allowance - If you set up a PAYE (Pay As You Earn) scheme in your new company, you can pay yourself a small salary to take advantage of your personal tax allowance. This money is considered an expense to your company, so you will not pay Corporation Tax on it.
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Business Expenses - A lot of expenses you will encounter as a contractor, such as equipment (laptops, etc.) or travel, can be put through the business as company expenses. Meaning that again, they’re taken out before you pay Corporation Tax, reducing your overall tax burden.
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VAT Flat-Rate Scheme - If you register for VAT, but don’t think you’ll be claiming a lot of VAT back (as most web developers don’t,) you can set up under the “flat rate” scheme instead, which allows you to charge your clients the standard 20% VAT, but HMRC will only take some of that from you - 14% in the case of web developers - meaning you get an extra 6% revenue from every invoice.
3 - Use a decent accounting package
It can be tempting to keep costs as low as possible when you’re starting out, by using spreadsheets and a word template for invoicing. This is fine, but you can end up wasting a lot of time keeping track of invoices, expenses and so on.
There are several really good online accounting services, such as FreeAgent. These services handle invoicing for you, reminders for clients, financial reporting, and will even integrate directly with your bank to keep track of your expenses.
Using a package like this will keep you better informed about what’s going on with your business and will save you time and money preparing your accounts at the end of each year. Freshbooks is even free if you only have up to three clients active at any one time.
4 - Banking
When you set up a limited company, you have to get the company its own bank account. This is because the company is its own legal entity, and thus the money it makes is not yours. I took it a step further than this, and set myself up as follows:
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Current Account - This is where money comes into, where I pay myself from and the account I use to pay the company credit card.
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Savings Account - Each month, I work out how much I can pay myself and how much I need to put aside for tax. That tax money goes into the savings account. I also put aside money for accountancy and other longer term costs.
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Credit Card - I don’t have an awful lot of company expenses, but those that I do have go on a credit card that gets paid off in full each month. This includes bills from Amazon Web Services, travel costs, and so on.
I can’t advise which bank is best for all of this, but all of my accounts are with Barclays (and by extension, Barclaycard.)
For those of you thinking about going it alone, or just starting out, I hope that this is of some use to you. Feel free to ask if you have any questions, though I can’t guarantee I will know the answer!
