I'm a current Phd student and have been offered to do some consultancy work for an organisation based in the UAE.
It will be a 3 month contract, approx fee I am charging is £10k. If the work is good they will extend the contract by another 3 months and the fee will increase to £15k.
There is possibility of further work as well so I am trying to figure out the most tax efficient way to set myself up. Should I operate as a sole trader or Ltd? I've searched on the net for the various pros and cons but it's all a bit overwhelming, just wondering how others in similar circumstances operate.
I am a freelancer/contractor with my own limited company.
If this is really just an occasional activity in the middle of your PHD then you should sign up with an "umbrella company" - simply google that term to find them.
These are perfectly legit companies that will allow you to work through them. They will handle all the tax and legal aspects and simply pass on the money to you minus their smallish fee.
Many long term contractors use umbrella firms for years rather than have the hassle of running their own ltd co.
It is not worth setting up a ltd co for less than a years work.
Pick one of the bigger umbrella firms and stay away from any that promise you higher than average returns - these are usually based on dodgy Isle of Man or other offshore tax dodges that attract unwanted attention.
If this is your only income this year, then you'll probably lose about 10-20% of the fee to taxes, the rest you get to keep.
Thanks for the reply Mr Cool,
I'm hoping this contract will be a stepping stone to more work that I can probably do whilst finishing off my PhD, that's why I was thinking of starting up an Ltd to establish "my name" so to speak.
Is it only financially viable to set up an Ltd if my earnings are in the higher earnings bracket then?
The cost of running a ltd co is fairly low - its more the hassle if you are also busy doing
other things - its also a pain to maintain a company through periods where you are not bringing in income
You can set up a firm online inside 24 hours and it will cost less than £100 - that gives you a registered company number
Next you need to register with HMRC (assuming UK) which is free, registering for Corporation tax and potentially for VAT if your turnover exceeds 75K-ish
If you want an accountant to do your ltd company returns at the end of the year, they will charge you about £70 a month for ongoing book-keeping and end of year accounts. If you want them to do your VAT returns it will be about £250 a year extra.
You can do all your own accounts - many people do - but I prefer to pay my accountant 1200 a year as its saves me the time, gives peace of mind and frankly they usually pay for themselves with tax saving advice. A self-employed friend of mine has just been hit with a £2K fine/interest due to miscalculation of his tax liability PLUS he's now had to pay an accountant 1500 to sort the mess out.
You''ll also need a bank account in the company name - this takes an hour to set up at any major bank and is usually free for at least the first 12 months, after which you might be looking at about a fiver a month in fees.
That's about it....
Boy, am I in a sharing mood today. If you do go down the route of a ltd company your P&L will look a little like this...
Income 15K plus any travel costs that you are allowed to reimburse (lets assume £5K) = 20K
Operating costs (setting up and running company, plus phone rental, plus accountant, plus any other legit expenses, plus £5K travel as outlined above) lets say 7K in total.
Salary – pay yourself £7,800 – the maximum tax free salary.
Profit – income (including the £5K travel) minus costs (again with the £5K travel) minus salary, so something like 20K minus £7K minus £7,800 = £5200
Corporation Tax = 20% of the profit, so 20% of £5200 = £1400
Retained profit available for dividends = £3,800
The very nice tax man says you can pay yourself up to £30,500 a year in dividends with no further tax to pay, (as long as you have no other personal income) if you do manage to extend the consultancy income.
Hi Mr Cool, I was just wondering - if dividends are taxed only at 20%, why do so many companies set themselves up as LLPs (which presumably get the drawings taxed at normal income tax rates)? Just wondering!!
That is incredibly helpful info Mr Cool, you exceed your name sake :)
That was the accounting bit I was unsure of. It's okay for me to take a salary as a director as well as receive dividends from being the single shareholder? It seems to be legally legitimate to do but feels a bit naughty.
adam85 - absolutely no obstacle to this. legally you are an director and a shareholder and can take the money out in that dual role.
If you go over the 7,800 tax free salary it will have an impact on your dividends, but until you have 7,800 + 30,400 = 38,200 to disperse after all your costs and taxes, then you do not need to worry about that.
See my next response (to BEP) for a further explanation of that...
BEP - dividends are not taxed at 20% - corporates are taxed at that rate (roughly). An individual business owner can earn 7,800 salary tax free (like any individual in the UK) and then accept dividends from the company of up to an additional 30,400 without further tax to pay (as can any UK shareholder of any company). This is because the corporation will already have paid 20% tax on the profits and dividends are not a tax deductable cost (as operating costs are).
This combination of allowances is very tax efficient for small businesses where the owner takes out up to 38K with very little tax due. (though they contribute to UK plc in the form of both corporate tax and VAT - so they are not pariahs!!)
However after the 30,400 dividend is paid out then all further dividends attract tax at 22.5% (don't ask why! its a combination of income tax levels and assumed corporate tax credits!), so the benefit of taking dividends narrows as you start to earn 100k, 200k etc.
A partnership pays NO corporate tax - it is free to disperse all profits to its owners (partners). This means 20% more to disperse, but leaves the individual owners to pay more individual income tax. For larger earners it is better to get a 20% bigger pot to share out and then manage your own tax affairs individually, particulalry if you live in a tax shelter, or have access to personal tax products/trusts that can be used to limit individual tax bills. What do you think the chances are of an accountancy-based consultancy firm being able to provide access to such smart products? Hmmmm....
A limited partnership simply provides partners with a degree of limited liability not enjoyed by traditional partnerships - see "Andersen Consulting/Enron" on wikipedia for a significantly more entertaining explanation of this feature.
Blimey that MBA and law degree may not have been wasted after all. I may well be earning my living by wet-nursing junior PM's, but at least I can dish out half-assed advice on an anonymous forum....