If you’re thinking of taking the plunge and becoming a contractor, you’ll need to make sure you’re choosing the right options. Here’s our guide to what’s out there.

Becoming a contractor is often seen as a big step, as you change from the relatively stable world of employment to the free life of a contractor. However, if you prepare appropriately and make the right choices, this doesn’t have to be a huge change in your life.

Part of the way to ensure this transition goes smoothly is to make sure you’re familiar with all your options, and work out which one is the best for you. There are plenty of different ways of working as a contractor, and it’s important you find the one that fits with how you want to work. However, the three main choices are between being a sole trader, forming a limited company or working as part of an umbrella company.

Choosing between these three can be easy, as long as you know what they entail. To help you out, here are the details of each way of working, along with the pros and cons of each:

Sole trader

When you start out on your own, you might think that it will be easiest to just work as a sole trader. This means that you and your business are effectively the same entity from a financial and legal perspective. This gives you a lot of control to work however you like, and there’s usually a lot less paperwork than if you wanted to start up a limited company.

However, this option provides very little security. Your business’ finances are your own, so if things go wrong you could end up personally bankrupt rather than just out of a job.

Limited company

Setting up a limited company means forming a legal entity separate from yourself. This in turn means that if the worst comes to pass, you are protected by your limited company and won’t be personally liable. You still have a lot of control, and you will usually be able to take home more of your earnings due to the extra tax options this choice offers.

Of course, there is a lot more organisation involved with this option. You’ll have to set it up in the first place, and complete a tax return every year, along with more paperwork. That said, the admin is often worth the financial rewards, and many limited company owners can easily afford accountancy services that will take care of all the day-to-day finance tasks for you.

Running a limited company can be very tax-efficient, meaning less of what you earn needs to go to HMRC. This probably makes this the most lucrative option, but many would gladly trade that for the simplicity of one of the other options; it depends on your personal preferences.

Umbrella company

This option leaves you with less control and freedom than the others, as it involves completing work through an intermediary. However, it is often seen as a good stepping-stone into one of the other options, as it is fairly similar to being permanently employed in many ways.

Essentially, the umbrella company will invoice the client you have done work for, then deduct PAYE tax and National Insurance from your earnings – along with a fee – and give you the rest. This means there is very little admin to undertake, as your tax will have been sorted out for you.

However, this does mean you won’t take home as much money, as you will not be as tax-efficient as you would be had you formed a limited company, and you’ll have to give part of your earnings to the umbrella company. Still, it is a good option for many, especially if you’re just starting out.

 

Book a free consultation today and find out more about each service option and how Brookson One can support you.