New to contracting? Here’s what you need to know for accounting
Setting up your own business and managing accounting and payroll can make the process of becoming a contractor overwhelming.
But it doesn’t need to be! If you’re new to contracting, here’s everything you need to know for accounting and how to manage it more effectively.
Your accounting options as a contractor
As a contractor you are usually in charge of setting up your own accountancy and payroll when accepting a role. You have a few accounting and payroll options available to you as a contractor. Here they are:
Setting up your own company and becoming the sole director/shareholder is a great way to run a contractor business, for various reasons:
- It offers legal options for you to be tax-efficient and maximise your take home pay. You get paid by your client directly to your business current account, and then you pay yourself through salary and dividends (minus tax).
- You have more flexibility and control over your finances.
- There are greater growth opportunities for the future i.e. financing, hiring employees, working with bigger clients, etc.
New contractors usually feel more comfortable hiring a contractor accountant to start their companies, assist with setting up their business current accounts and take care of the majority of ongoing admin.
Ready to be your own boss? You can register your business with Tide for FREE! We’ll not only pay the £12 registration fee for you, but we’ll also give you a free business account so you can manage your finances more effectively.
Being a sole trader or self-employed means that you run a business without having a separate entity – like a limited company – to operate the business.
This means you all you need to do is register as self-employed and pay tax on your business profit. It’s an easy way to run a business, although one thing to keep in mind is that there’s nothing protecting you personally from financial loss.
Most self-employed pros prefer hassle-free, modern business banking to help them manage their finances. As a sole trader, finding the perfect combination of business banking and accountancy support is the key to running a business smoothly.
Some recruitment agencies run payroll for contractors on their books and make income tax and National Insurance payments on their behalf, much like regular employers. However not all recruitment agencies offer this option, nor is it tax-efficient.
Working through an umbrella company is an easy, hassle-free way to get paid as a contractor. It involves becoming an ‘employee’ of an umbrella company through an overarching contract. The umbrella company will deduct your tax and National Insurance and deposit your pay in your personal bank account.
This is the common and recommended route for short-term, lower paid and public sector contractors, but it’s not necessarily the most tax efficient option.
If you’re new to contracting, you need to weigh the pros and cons of each accounting/payroll option and decide which is best for you and your specific circumstances. There are resources such as contractor take home pay calculators, comparison sites, and free guides to help you along the way.