There are several options open to an individual when contemplating contracting. It is advisable to investigate all options and have everything finalised before accepting a contract. There are certain criteria which have to be met but, in general, Connections will happily work with your own UK-based limited company or a umbrella company.

The main reason contractors use an umbrella company is that it removes the hassles associated with setting up and running your own limited company. The umbrella company invoices the agency (or end client) for work completed by the contractor and pays them a net salary minus the necessary tax and national insurance contributions. The umbrella company deals with most of, if not all, the administrative work associated with operating on a freelance basis.

Many contractors take short contracts between permanent roles; in this case, a limited company is really not a viable option, so using an umbrella company can often prove to be the perfect solution. It should be quick and easy to register with an umbrella company and just as easy to leave.

An umbrella company is often a good starting point for first-time contractors. The responsibility of running a limited company can be quite daunting and many contractors prefer to use an umbrella company for the first few months, to decide whether they wish to continue with the contracting route, before making the transition to their own limited company.

When using the services of an umbrella company, you are paid on a PAYE basis. This means that all your tax and national insurance liabilities are taken care of by the company, with the added advantage that you need not worry about IR35-related issues. It also means that you will not receive any unexpected tax demands or have to worry about saving for your tax bill.

As an independent contractor you are able to claim Inland Revenue permitted expenses. These are either processed as a tax benefit, thereby reducing your tax and NI liability or reimbursed to you by your agency/client. An umbrella company will process these expenses for you – usually free of charge. You should be aware that an umbrella company dispensation does not mean that you can claim all expenses that are covered by that dispensation. It just means that your umbrella company does not have to record them on a P11D form for the Inland Revenue. You can only claim expenses for those costs that you have actually incurred, that are wholly attributable to the contract – and you must keep receipts!

Some companies advertise themselves as an umbrella solution when they are, in fact, a managed or composite company and those new to freelancing should be aware of the distinction. Composite or managed companies will usually pay a minimum wage and dividends to the contractor rather than using PAYE. However, the new contractor should be aware that IR35 dictates the way that you are paid. The Inland Revenue have stated that you can only draw dividends from your own, or a managed, limited company if your contract falls outside of IR35. If your contract falls inside IR35 your only option is to be paid through PAYE. Your prospective umbrella company should provide you with a free-of-charge review of your contract to confirm your status.

In the 2006 pre-budget report the Chancellor deemed that any contractor not operating a personal limited company would have no option but to be paid via PAYE. Prior to the legislation contractors had the option to use managed limited companies or composite companies which would enable them to draw dividends from a limited company over which they did not have financial control. Since March 2007 this option has become effectively illegal and any contractor operating in this way is at risk of investigation by the Inland Revenue which could lead to significant financial penalties.

Connections do not recommend any specific umbrella companies as each individual has different requirement. Contractors should try contacting a few companies to make comparisons and find he best solution for their own situation

There are a few listed below as a starting point

Most contractors who have been in the industry for a reasonable length of time work through their own limited company. This offers complete control of your own business affairs. This is the most expensive, and time-consuming method but contractor opinion would suggest that the positives outweigh than the negatives. It is important that the company is UK registered as current tax legislation requires deduction of PAYE and NIC from payments to offshore companies. Any agency who does not do this is in breach of the legislation and is therefore liable to heavy penalties and tax claims. Due to the risks involved, Connections Recruitment, along with most other agencies in the industry, will not deal with contractors who have offshore limited companies.

In general contractors working at client sites do not comply with the inland revenue's definition of what self-employed means. As such the agency is obligated to deduct PAYE and NIC from the contractor's pay and if they do not they are in breach of the legislation. In practice, the penalties can fall on either the client or the agency, depending upon what the Inland Revenue decides. This makes this method risky for both parties and as a result no agencies are willing to pay contractors on this basis.

Many contractors initially shy away from the limited company route because they are under the impression that it is complicated, time-consuming, and expensive. In reality, it is relatively simple as long as you know what you are doing and it can be cost-effective if you intend to contract in the long term and make a career of your contracting business. Unless you are familiar with the procedures of starting your own limited company, the best advice would be to appoint an accountant and let them do the work for you.

The easiest way to approach this is to buy an off-the-shelf company. This will cost approximately £150, and can be obtained easily by your accountant or solicitor. The only drawback is that these companies will already have a name. To set up your own company with a name of your choice is more expensive and takes longer.

Most contractors find it is best to appoint an accountant and unless you are capable of dealing with your accounts and taxation requirements, this is the advice we would give to you. Make sure you find an accountant you trust; one who is recommended by another contractor is usually best. If you want to find your own, it is advisable to find one that has experience of the contract market, and who is prepared to meet you outside of normal working hours. Once you have agreed the details with your accountant, obtain a letter formally stating the arrangements that have been agreed.

At least one director and one company secretary have to be appointed to your limited company. One person can fulfil both roles. The contractor's husband/wife/partner is often an ideal candidate for the role of company secretary. Issue the shares; you do not need to have more than one shareholder. Appoint a registered office address; this would usually be the contractor's home address, or the office of the accountant. Select an accounting reference date; this is the year end for preparing the company's accounts.

Open a company bank account. Obtain a PAYE reference; this is necessary as you are effectively an employee of the limited company. Your accountant will be able to help with this. VAT registration; it may be advantageous to register the Limited Company for VAT. Again, your accountant will be able to advise you on this. Other concerns, such as accounting records and minimising tax liability, should be discussed with your accountant.

There are certain insurance requirements that the contractor is legally obligated to have. It is best to discuss these with a reputable insurance broker, but the main types of cover are

We hope this has answered most of your questions, but if you have any queries please email them to us at contracts@connectionsrecruit.co.uk and we'll do our utmost to answer them.