Newbie - Needs advice

[MikeC1984]

Hi,

I am completely new to contracting and still in a permanent position at the moment. Apologies for the no of questions but I need to get things clear in my head before I make any decisions. I am seriously considering moving into contracting but wanted to as a few (well a lot) of questions to clear things in my mind. I plan to setup a ltd company and contract as a database admin / systems admin initially till I get used to the role. I have read a lot about IR35 and am getting increasingly worried about getting it all right, a friend of a friend is contracting and pays himself the bare minimum and the rest in dividends. But the more and more I read about it the dodgier it seems!

1. What is the best way to go about things? If I paid myself a decent salary say £20k and the rest in dividends is this ok? Or is this no different than paying yourself min wage and the rest in dividends?
2. I assume I need to create a contract myself to give the employer? Or is this only done by them? What sort of thing do I need to look for, for this to fall outside IR35?
3. How are you normally paid? And how often do you invoice? Say for example I got a contract tomorrow when would you assume first payment? One month from the start date?
4. What happens if you complete the work and they decide not to pay? Do you have to start chasing through small claims and the like?
5. As the owner of the company if I got a contract job and decided to call in a friend/family member (and pay them out my own pocket) is this ok/normal practice. For example if I was hired in to look after a company’s servers and decided to hire a friend who has skills in an area I lack to assist me or decided to half the workload and paid them through my company is this frowned upon by potential employers?
6. Can someone clear up IR35? How does a contracting job become outside IR35? I assume this is a contract by contract basis?

Sorry again for the no of questions!

I look forward to hearing your advice on any of the above

Regards

Michael

[Gonzo]

Originally Posted by MikeC1984

Hi,

I am completely new to contracting and still in a permanent position at the moment. Apologies for the no of questions but I need to get things clear in my head before I make any decisions. I am seriously considering moving into contracting but wanted to as a few (well a lot) of questions to clear things in my mind. I plan to setup a ltd company and contract as a database admin / systems admin initially till I get used to the role. I have read a lot about IR35 and am getting increasingly worried about getting it all right, a friend of a friend is contracting and pays himself the bare minimum and the rest in dividends. But the more and more I read about it the dodgier it seems!

1. What is the best way to go about things? If I paid myself a decent salary say £20k and the rest in dividends is this ok? Or is this no different than paying yourself min wage and the rest in dividends?
2. I assume I need to create a contract myself to give the employer? Or is this only done by them? What sort of thing do I need to look for, for this to fall outside IR35?
3. How are you normally paid? And how often do you invoice? Say for example I got a contract tomorrow when would you assume first payment? One month from the start date?
4. What happens if you complete the work and they decide not to pay? Do you have to start chasing through small claims and the like?
5. As the owner of the company if I got a contract job and decided to call in a friend/family member (and pay them out my own pocket) is this ok/normal practice. For example if I was hired in to look after a company’s servers and decided to hire a friend who has skills in an area I lack to assist me or decided to half the workload and paid them through my company is this frowned upon by potential employers?
6. Can someone clear up IR35? How does a contracting job become outside IR35? I assume this is a contract by contract basis?

Sorry again for the no of questions!

I look forward to hearing your advice on any of the above

Regards

Michael

OK, I'll be the first to say it.

The best thing for you to do at this stage is to read the first-timers guides. There is one on this site, one on the Professional Contractors Group website and another one on the SJD accountancy website to name a few.

Read them all.

In response to your questions:

1. How long is a piece of string? The most tax efficient if you have a Limited Company is to pay yourself salary up to the limit where you would have to pay national insurance, and then take the rest as dividends. But if you are caught by IR35 you can't do it.

Some people think that paying themselves £20K ish as salary and taking the rest as dividends is prudent to keep Hector at bay, but others think that they are wasting their money.

2. Normally you will be supplied to the client via an Agency and they will create the contract. The Professional Contractors Group have templates if you join them and need them because you are going direct to the client without and agent.

3. Some invoice weekly, others invoice monthly, it will be specified in the contract. Expect payment terms up to 30 days after invoice if going through an agent, longer than that if you are going direct.

4. Small claims court - you will be a business and need to act accordingly, noone is going to hold your hand.

5. This is known as substitution. It should be allowed in the contract.

6. You are right, IR35 is on a contract by contract basis. Your contract and working practices need to both be outside it. I am not going into more detail than that.

What are your reasons for wanting to contract may I ask? Is it just that your friend seems to have a load more cash than you do?

[NotAllThere]

1. The higher the salary, the less chance of investigation for IR35. BUT if you're outside IR35 then I'd go dividends and no PAYE.

2. 9 times out of 10, contract is through an agency. THERE IS NO EMPLOYER!!! THERE IS ONLY THE CLIENT. Usually they draw up a contract, you pass it on to your legal services provider and negotiate changes to get it outside of IR35, and other changes that suit you better.

3. Invoice weekly/monthly after the work is done. Payment within a few days to never, depending on agency/client.

4. www.payontime.co.uk Excellent preparatory reading for the wannbe contractor

5. While many contracts have a right of substitution, most clients will expect you to do the work. It's great, however, if you can bring in others. Also depends on the nature of the work.

6. No-one can clear up IR35. That's the problem. It's vague and ambiguous.

[MikeC1984]

Thanks for the comments guy's ill check out some of those websites tonight. Im still trying to understand what is and isnt outside IR35 but im sure I will get there one day!

Originally Posted by Gonzo

What are your reasons for wanting to contract may I ask? Is it just that your friend seems to have a load more cash than you do?

Well that doesnt exactly put me off!!! but its a freind of a freind so I have ever actually met him (just emailed) but my main reason is I want to start gaining alot more experiance of different technologies and learn from other organisations as well.

At the moment I am a permie and have been at the same company for 5 yrs working my way through the ranks to a mgmt position. I have spent alot of money and time certifying myself in the process and am now in a position where i'm sick of doing the same old work day in day out. I work for an estate agents so you can imagine how fun our budgeting is at the moment. There is no scope for any new projects and not many plans to upgrade any of the internal infrastructure for a while. The technical skills I have worked for in the past I feel I lose as time goes on and being stuck in a dead end job where I cannot exercise these skills. Im 24 and have only worked for 3 companies mainly on the same technologies so think its time to move on and build the CV and learn new skills and equally importantly pick up how other companies operate.

Oh and the money won't hurt! :P

[HaPpY_DaZe]

Originally Posted by NotAllThere

1. The higher the salary, the less chance of investigation for IR35. BUT if you're outside IR35 then I'd go dividends and no PAYE.

If you start a pension, doesn't the amount of salary play a factor in how much you can pay into the pension plan?

Or am I just old fashioned and people don't do pensions?

[MikeC1984]

Few more questions:

1. If you are charging VAT I take it you add this to your daily rate? or once you have agreed your daily rate is it assumed that you will charge VAT on top?

2. How does contracting affect your state pension? Does paying yourself at least a min wage keep the NI topped up for the future (excl. private pensions)

3. Does everyone get an accountant for simplifying things or is it difficult to do your own books? (I think I will get one anyway)

4. How does contracting (wage and dividends) affect a mortgage application? Will I struggle as my partner doesnt work at all (looks after baby)

[badger7579]

[quote=NotAllThere;609830]1. The higher the salary, the less chance of investigation for IR35. BUT if you're outside IR35 then I'd go dividends and no PAYE.

Sorry am I missing something something. IR35 is to do with working practices not how your company pays its employees.

[chris79]

[quote=badger7579;615067]

Originally Posted by NotAllThere

1. The higher the salary, the less chance of investigation for IR35. BUT if you're outside IR35 then I'd go dividends and no PAYE.

Sorry am I missing something something. IR35 is to do with working practices not how your company pays its employees.

IR35 is to do with working practices correct, but if you fall inside IR35 you cannot take dividends as a wage, it needs to be full PAYE, so it does have a bearing on how your company pays out money.

[badger7579]

[quote=chris79;615070]

Originally Posted by badger7579

IR35 is to do with working practices correct, but if you fall inside IR35 you cannot take dividends as a wage, it needs to be full PAYE, so it does have a bearing on how your company pays out money.

Ah ok I missunderstood. I thought you were saying that the way you were paid by your company could determine your IR35 status.

[Gonzo]

Originally Posted by MikeC1984

Few more questions:

1. If you are charging VAT I take it you add this to your daily rate? or once you have agreed your daily rate is it assumed that you will charge VAT on top?

2. How does contracting affect your state pension? Does paying yourself at least a min wage keep the NI topped up for the future (excl. private pensions)

3. Does everyone get an accountant for simplifying things or is it difficult to do your own books? (I think I will get one anyway)

4. How does contracting (wage and dividends) affect a mortgage application? Will I struggle as my partner doesnt work at all (looks after baby)

Have you read the first-timers guides yet?

1. You agree the rate excluding VAT and then add it on to your invoices (once you are registered for VAT).

2. There is a minimum amount to pay yourself a year that keeps the NI topped up. I don't know exactly what it is but it is more like half the minimum wage.

3. There are some that think they can go ahead on their own, but most use an accountant, and it would certainly be recommended at first.

4. Some providers are completely geared up to deal with the way that we pay ourselves, some are not.