Many self-employed builders or contractors will start out on a sole trader basis. As a sole trader you are the single owner of your business, this is the case whether you work alone or you decide to hire employees. To become a sole trader you will need to register with HM Revenue and Customs (HMRC) and you are able to start trading. Sole traders have unlimited liability, which means that you must take responsibility for any debts that your business may have.
For contractors that want to keep things simple using an umbrella company, where you essentially become an employee of the umbrella company, can seem like a good option as the umbrella company will take care of the financial side of things. However, some contractors who choose this option may find that they are not taking home as much of their contract as they were expecting. Although working through an umbrella company may seem the easiest option it is also the most expensive, which is why it is most beneficial for those who are only planning on contracting for a short period of time. Umbrella companies will deduct your income tax and national insurance contributions using the PAYE system and they will also charge a fee for their service.
Another point to be aware of if opting for the umbrella company option is that if you were to be investigated by HMRC, it is you the contractor that would be liable for any discrepancies, not the umbrella company. There are many umbrella companies that will add on a daily un-receipted expense amount, but remember if you are claiming an expense then you will need to have a receipt for it. With this in mind if the umbrella company you are thinking about contracting under is promising something which seems too good to be true, then it probably is.
Forming your own limited company is another option that many contractors decide is best for them. Limited company ownership is generally the most tax efficient way of working for building contractors. A limited company is considered a separate entity from its directors, which means that if your company was to run into financial troubles your personal assets would not be at risk.
One of the main reasons why contractors decide to work as directors of their own limited company is that they maintain control over their own financials. Contractors who work under an umbrella company must rely on the umbrella company to collect their earnings from the client and pay them on to them, a thought that just doesn’t sit well with some contractors.
Whether you decide to go limited, employ the services of an umbrella company or work as a sole trader each option comes with both positive and negative aspects. As a contractor in the construction industry some of the factors that you need to consider are, whether or not you need the protection that comes with limited company ownership, and how long you are going to be contracting for. Your circumstances may change as your business
grows so what is right for you now, may not fit your situation five years from now.
For more information on making the right choice, you may find this limited company or umbrella company guide by contractor accountants Nixon Williams useful.
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