Contractors' Questions: Is 'Ltd' best if I must soon be on-payroll?

Contractor’s Question: I recently started working for a new organisation – currently I’m freelance for them and am awaiting a temporary contract. But my work agreement says I will be put on the organisation’s payroll in six months.

For now, though, what are my set-up options? Should I form my own limited company as it is the most tax-efficient way to work or, because I will be put on the payroll shortly, are there other options I should consider instead of a limited company?

Expert’s Answer: Given that you're only six months away from joining your client's payroll, it's not going to be worth the effort of forming a limited company.

By the time you've completed all the various registration tasks (such as PAYE and VAT) you'll then need to de-register and close down your company!

In addition, you're still going to need to pay for and produce a full set of accounts, even though you've only traded for six months. Therefore, if there's no likelihood of using a limited company once you become a salaried employee, I'd strongly discourage you from taking this route.

Instead, there are two more appropriate choices open to you in your current circumstances:

Join an umbrella company

Umbrellas provide payroll services for freelancers and contractors. Your client will pay your invoices directly to the umbrella which will then produce a payslip for you, calculate your deductions and pay your net salary directly into your bank account. You pay a weekly or monthly fee to use this service and it is easy to move from the umbrella to your employer's payroll. An umbrella is a low-friction way to get paid, while ensuring you're paying the correct amount of tax.

Become self-employed

You could also pursue the route of self-employment. At the end of the tax year, you'll need to produce a set of self-employed accounts. You'll then record the profit from these accounts on your Self Assessment tax return, at which point you'll need to pay tax and National Insurance. In addition, you'll need to pay a small National Insurance contribution (Class 2) each month now that you're self employed. You'll need to ensure that you're keeping accurate records if you're self employed.

In conclusion, I don't think it would be practical in light of your circumstances for you to form a limited company. Instead, consider contacting an umbrella service and an accountant, with a view to discussing the fees involved with these two approaches.

The expert was Matt Poyser, co-founder of inniAccounts, an online accountancy firm serving contractors, freelancers and the self-employed.