Contractor UK is a go-to resource for the contracting community, offering daily news, contract job postings, market rates, calculators, and an active forum with over 26,000 members. Laura Wilkinson, Digital Marketing Manager at Contractor UK, explains how you can get started in contracting.

If you’re considering becoming a contractor, or you’ve just landed your first contract, you need to decide how best to set up and run your contracting business.

The two most popular options are working through an umbrella company or setting up as a limited company, but what’s the difference between the two? Of course, sole trader could be another option, but it’s less common for reasons related to tax and liability.

Umbrella company or limited company?

An umbrella company can often seem like a simpler option, especially to contractors who are just starting out, or those looking to only contract in the short-term.

The umbrella company acts as your employer and you effectively become their employee, being paid through the PAYE system. It’s the lowest admin option as the umbrella company invoices the client on your behalf and processes your payments, accounting for tax and National Insurance. However, they will normally take a margin each time you’re paid too.

A limited company is often the most tax-efficient way to run your contracting business, particularly if you are working on contracts that are outside of IR35. As a limited company director, you’re required to keep track of your income and expenses, including receipts and invoices. You will also need to submit your year-end accounts and tax returns.

This might sound daunting, however, a good contractor accountant, alongside specialist banking and accounting software, can save limited company contractors a lot of time, money and stress.

Digital providers have also made many things easier, from registering at Companies House to invoicing and managing your finances, so there may be less reason to use an umbrella company nowadays.

Forming a limited company

Creating your limited company can be simple, and may be done directly on the Companies House website or through a company formation agent. You will firstly need to choose your company name and check if it’s available. Starling Bank has also created a Business guide on how to set up a limited company.

Business bank account

Once your limited company has been formed, you’ll need to set up a business bank account. A limited company is a separate legal entity and as such, the money the company makes needs to be kept completely separate from your personal funds.

Starling Bank has a number of features which can help and are beneficial to contractors. These include their instant notifications, when money is spent or received, automatic organisation and categorisation of outgoings, and multi-currency accounts.

Bookkeeping and accounting

Appointing a specialist contractor accountant can save you a lot of time with the administration, allowing you to focus on actually completing your contract work.

Accounting and bookkeeping software can also reduce time spent on admin. Starling offers its own Business Toolkit, which makes it easy to manage your contracting business with banking and bookkeeping all in one place. You can manage your invoices, bills, tax, VAT and more all from your bank account, with their Business Toolkit, for just £7 a month.

If you have more complex accounting needs, you could instead integrate your Starling Bank account directly with one of the popular accounting software providers like Xero, FreeAgent or QuickBooks, through the Starling Bank marketplace. Integration means your accounting application stays up to date with your banking data, which makes managing your cashflow easier.

For more information about contracting you can visit the Contractor UK website.

The above article is intended as general information and does not constitute advice in any way. You should take independent legal advice if you have any questions about your specific circumstances.

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