Choosing An Accountant

Given the large amount of administration required in running your company, you will need to find a good accountant to manage this work on your behalf.

Typical services performed by an accountant would include some or all of the following - make sure you check what is included in your monthly fee before signing up:

Typically, you will expect to pay £60 - £90 per month for a reputable firm. Make sure you find out what this fee includes - beware of hidden 'extras' (such as a £15 monthly charge simply for having a company car).

Many contractors have tried several accountants over the years, before settling for one they feel comfortable with. At some stage, you may feel the need to move accountants for whatever reason - the best time to do this is after a company year end, since most outstanding paperwork should have been completed by this stage.

Some Financial Matters

Value Added Tax (V.A.T)

For limited companies expecting to turnover more than £54,000 per annum (after 31/3/2001), you should register for V.A.T - this simply means that you collect V.A.T on behalf of Customs & Excise on sales invoices paid by the Client.

Each quarter, the C&E will send you a green V.A.T return for completion. All V.A.T claimed on your sales invoices (or received - see below) minus V.A.T paid on legitimate company expenses (such as computer equipment) should be repaid. V.A.T is currently 17.5%.

You can calculate (and repay) VAT on a cash or accruals basis - i.e. based on when you receive V.A.T from your invoices, or based on invoices sent during the V.A.T quarter for which you may not yet have received payment. Your accountant should advise which method is best for you.

Personal Income Tax

Whether you pay yourself a large salary and minimal (or no) dividends, or a small salary and large dividends, you will be liable to income tax on all money you pay yourself from your company. Assuming you will reach the higher rate (40%) tax band with your combined income from the company, you will have to fill out a self assessment form for income received in each tax year. The tax is payable by 31st January of the following year.

The Inland Revenue have also introduced 'payments on account' which you should be aware of. If you owe £5,000 in tax for the previous year, you will also have to pay the same amount again (in advance) - i.e. £5,000 + £2,500 in January, then the remaining £2,500 in June.

At the end of the tax year, you will also receive 'tax credits' for any dividends you have paid yourself. Instead of paying 40% tax (for the higher rate proportion) on dividends you may have paid yourself, you will receive tax credits, since dividends have already been subjected to corporation tax.

For contractors caught by the IR35 rules, your income will be in the form of a 'deemed salary' after deductions for expenses and National Insurance.

National Insurance (N.I)

National Insurance is paid in proportion to your salary level (to fund state services and the state pension). Not only do you have to pay Employees NI, but if you are also your 'employer' (via a Limited Company), you are also liable to Employers NI (currently 11.9% in 2001/2). The vast majority of contractors opt to pay themselves low salaries and high dividends, since N.I is not payable on dividends. National Insurance is usually deducted at source - from your payroll (if your have an accountant), so chances are, you will rarely have to deal with administration related to NI.

Corporation Tax

Corporation Tax is payable on your limited company's profits, following deductions for expenses. Tax is calculated after your company year end and becomes payable nine months after this date. From April 2000, the Chancellor announced a new 10% tax rate on the first £10,000 of profits. Advanced Corporation Tax has been abolished - now you must make your full Corporation Tax payment within 9 months of your Company year end. As with personal tax, we would recommend you set aside some of your turnover on a regular basis to go towards your end of year liabilities.

2001-2 Tax Tables

Expenses

A wide variety of expenses can be legitimately claimed against your limited company, saving tax in the process. For those contractors caught by IR35, there will now be a 5% general allowance for expenses instead of an unlimited allowance, although you can still claim 'Schedule E' expenses, such as subsistence and pension payments. For contractors using umbrella companies 'Schedule E' expenses can be claimed and some companies offer 'expenses dispensations' which can provide additional tax savings.

IR35 - An outline

Pensions

Pensions have long been the most efficient way of reducing tax and NI liabilities. For example; Pension contributions of £6,000 per annum would result in a tax saving of £2,400 for the higher rate taxpayer (assuming 40% higher tax band).

For contractors affected by IR35, there may be significant benefits in investing in a pension - since this will reduce your overall national insurance and PAYE liability.

Since there are a wide variety of pension schemes available, it is essential that you get truly independent advice - it could save you thousands. Consult an Independent Financial Adviser before you sign anything.

ContractorMoney.com - Specialist advice for IT contractors.

All those forms

All directors, regardless of income, must complete a P11D Return of expenses' payments and benefits form annually. The P60 is a statement of how much PAYE tax and National Insurance has been paid during the year. The P35 form is a complete summary of everything. Your accountant should handle the completion of all these forms.

Company Cars

Once seen as a great tax benefit, the government has gradually eroded the tax benefit of owning a company car. Whether you will benefit from such a purchase will depend on a variety of factors, such as the value of the vehicle, engine capacity and especially the mileage you would build up on contractor business.

The benefit in kind reduces depending on the mileage (Under 2500 miles, 2501 to 18000 miles and over 18000 miles per annum). The taxable value of the car will also depreciate each year. The rules and regulations are highly complex and should be discussed with your accountant. IR35 is not expected to affect current Company Car taxation rules.

Insurance

A complex and once expensive area of contractor finance, many contractors are now looking at the various insurance policies which are available to protect you in the event of an accident at work, or claims against you for negligence.

IT contractors provide professional advice which is relied upon by others (clients). This means if you make a mistake in your work you have a direct financial responsibility to your client for the errors. Whilst you may consider the possibility remote, it does happen.

Increasingly, some clients are insisting on evidence of professional indemnity insurance and having this protection will prove to your clients that you are professional in your approach and will help in obtaining future work. Although mistakes are rare, these policies are now reasonably priced and will also provide peace of mind.

Contractor Insurance Guide

No Nonsense Summary

To put it simply... If you are working through a limited company, you will pay yourself a monthly salary (many take a small salary). Those caught by IR35 will pay themselves a 'deemed salary'.

PAYE (Income Tax), Employers and Employees National Insurance will typically be deducted when your accountant processes your payroll.

You will also claim back any expenses you may have incurred from the Company at regular intervals (e.g. stamps, training, PC equipment, etc.). For those caught by IR35, you are allowed to claim a 5% 'expenses allowance'

If you are working through a limited company and are not affected by the IR35 rules, the bulk of your income will come in the form of dividends which you will withdraw from your company account (at sensible intervals).

At Company year end (typically 12 months after incorporation), your accountant will prepare your company accounts. You will then be liable to corporation tax on all company profits for the previous 12 months (i.e. Turnover minus expenses, salary, executive pension, etc.). This is payable 9 months following your year end.

You will also be liable to pay any personal tax liabilities via the self assessment process, to include all personal income received and taking into account any 'benefits in kind'. This liability must be met by 31st January each year (for year ending the previous April).

You should seek advice from an accountant or professional advisor before acting on any information contained in our First Timers Guide.

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