Going self employed

[Citizen of Legoland]

Can someone explain the benefits / drawbacks of being in and out of IR35?

At the beginning at least, my current employer are likely to be my biggest client. My plan is for this to be the case for the first year or so while I find my feet and build a more diverse client base.

They are a limited company (and a registered charity if that matters?) with a turnover of less than £10m.

Just to point out that if a contract is deemed to be outside of IR35 then that doesn't mean you have to undertake it via a limited company, you can still choose to be taxed like an employee. If you did that then there is little difference whatsoever between the two. The benefits and drawbacks usually come into play when you decide how to operate if you have an option to do so. From my experience both are simple to do so don't be put off by the lengthy descriptions and of course, double check any advice you get (including mine) as it's easy to interpret things in an unintended way.

To get the most money out of an outside contract you will need to set up an LTD with you as the sole shareholder and employee. Therefore you have some small initial costs and effort to set up the company using an accountant. They should recommend getting some business insurances but overall you'll be looking at about £150 - £200 pm I would guess. Some accountant fees include doing your self-assessment tax affairs later on so that comes in handy. Once set up (it doesn't take more than a couple of weeks) you can start raising invoices and getting paid after 30/60 days - hopefully. Probably you'll get 7 to 10% more cash this way out of your daily rate but that's before all these costs above. No holiday pay, sickness, pension etc. You get your money in two ways usually, firstly via an employee salary out of your own company and then via dividends. Only if there are funds in the business of course so the first 3 to 6 months can be challenging.

If you choose to (or have to) operate inside then the client may be able to tax you as an employee but you still don't get employee rights such as holiday pay, sickness, pension etc. If they can't/won't pay you that way then you can use what's known as an umbrella company as an intermediary. You become an employee of the umbrella company and they handle the invoice to the client and then tax you accordingly like a full-time worker. They charge a monthly fee of £60 - £100 (sometimes weekly) but you've no set up costs, no self-assessment. It's a lot easier and money usually is received faster BUT there are one or two dodgy ones out there. Benefits are minimal but you do sometimes get the chance to use their pension scheme. A third way for inside IR35 is to use your LTD and accountant to deduct tax/NI but I've never used this option myself, but my accountant assures me it is simple.

I hope this helps. I have recommendations for an accountant and an umbrella if you ever need them.

 

[Prestwich_Blue]

Lots of useful stuff here. I need to look into the IR35 thing as it sounds like it will be relevant.

No need to bicker - all the info in here is really appreciated.

IR35 supposedly deals with 'disguised employment', whereby companies effectively employ staff but without giving them normal employment rights like paid holidays, sick pay or paying Employers NI. Many companies routinely abuse this without sanction but the people who get caught are people like IT contractors, who contract to companies for a fixed period and have absolutely no desire to be employees. If you're doing short pieces of work for multiple companies, then it's unlikely IR35 will apply. On the other hand, if you're doing work for just one company exclusively, for 2 years or more, then you might be in the spotlight.

Compare it to being a tradesman, for example, who does work for many different customers, who can decide which customers he does work for, when he does it and how much to charge. Whereas another might work for a bigger company and gets told where to go, when to go and has no control over charging.

If you set up a company you'll have to pay Corporation Tax on any profits, and as a service company with minimal expenses that will be on most of what you earn. You'd generally try to pay yourself a salary that didn't incur much tax or NI and used to be able to top that up with dividends but HMRC have clamped down on that to a large degree. There's now very little difference between the two methods.

You must speak to an accountant but I've done a 'back of an envelope' calculation and if you were to turnover £75k, you'd come out with about £62.5k after tax and NI as a PAYE employee. So that's about £17.5k in Tax & NI.

If you worked through a limited company and earned. the same then I've assumed you've claimed £5k in legitimate expenses and then you take £48k as salary plus £2k dividend you're allowed to take without paying further tax, (which means you aren't paying higher rate tax) then you'd come out with about £37.5k in your pocket. That' would involve paying about £11.5k tax/NI. But that would leave £22k profit (£75k - the 5k expenses and the 48k in wages) and you'd pay £5.5k Corporation tax on that, giving you a total tax bill of around £17k. So very little benefit these days but there are other possible reasons why you might choose one basis over another so it's imperative to speak to an expert.

I've done both freelance and employed and if you can bring in the clients and be financially disciplined and stay on top of your admin then it could well work out nicely for you. But there are risks as well. If you can't bring in the customers, customers go bust owing you money or are dragging their feet paying, if the bottom drops out of the market, you're ill long-term or even if you want to take some time off but the client is pushing for work to be completed. Relying on one big client can also be dangerous, as people have said.

Whatever you do, get good professional advice and think it through carefully. But there's nothing to stop you trying it and seeing how it works out. Good luck whatever you decide.

 

[diegoalv]

Congrats and good luck with the freelance job!
Please let us know how it goes.

 

[fulabeer]

When i first went self employed, i was all over the show.
I didn't really know what i was doing and didn't really know what to charge.

I knew i was too cheap as i was getting all of the quotes.
I viewed it as a learning curve, and a way to build a customer base.

But reality bites, and i eventually had to raise my prices. To my amazement, i didn't lose any business.
So i did it again, and only had the odd grumble.

The one thing i stuck to was quality of service. This meant now and again i actually lost money on some jobs.
The reward for this attitude is a full order book and some of the wealthiest people as clients.

For a while, i did long to just go back to my easy employed job.
Not now. I could never have somebody over me again.