(edit for spelling)
My advice and I've repeated it continually on Contractor UK for years is to only use a proper umbrella company or use a limited company.
If someone says you'll receive more than 65-70% of you contract value from a umbrella company or more than 80% from a limited company they are just lying to you and wish to use your greed to initially grab money off you and then let HMRC take you to court...
For details on proper umbrella companies see http://www.allumbrellacompaniesareequal.com/ . But if you are planning to do this long term start a limited company....
I contracted for about 10 years in the UK, finance mostly. Had my own Ltd, took home about 65% of my day rate. No funny business, happened to move clients about every two years which helped for IR35.
Nothing more complicated than that. Yes that means I paid 35% tax, which is pretty much the equivalent I would have paid if I could have ever found anyone who would pay me my day rate as a salary.
1. I believe in a progressive tax system and public services
2. I don't believe in working for an umbrella based in Norther Cyprus which is owned by a Trust of which I am a trustee which pays me loans on a semi-regular basis of 80-88% of my day rate with absolutely zero tax paid by me.
HMRC is cracking down on IT Contractor loans anyway, and quite a few people are rightly being hit up for quite large amounts of tax.
If the UK public had any idea how many (roughly 50k contractors in the City) avoided paying so much tax (billions) while they were being mugged by PAYE there would be a total bun fight.
Me. I'm still wealthy, my dad was a teacher, my mum a stay-at-home mum. Went to state schools, drove on state roads, took the benefit of people who actually paid tax.
To all the "I could pay some of my extra money to a charity / local school" brigade. Sure, but you never did - you parasite. Feel free to thank me for providing all those public services for you if you like.
What do you define as "no funny business"? Just curious what you mean by that.
I operate a Ltd, take a low salary and the rest dividends (as recommended by my accountant), claim the odd lunch and transport as expenses and that is about it, which I think is fine (both legally and morally) as at the end of the day, I am operating as a company rather than an employee, and am following the letter of the law.
I actually don't think the difference in tax paid is that significant if you operate that way, I've not worked it out exactly but I suspect I pay around the same amount of tax as a contractor with an Ltd as I would in an equivalent permanent position (in the sense that the perm salary would be lower but the tax a bit higher), so I don't really feel bad about my contribution back in terms of taxation.
Of course, I've worked with people who do take the p*ss and will put anything and everything through as expenses and find all the tax loopholes they can - seems like a lot of effort and risk and not sure I'd feel morally great about it, but each to their own I guess!
The main advantages as I saw them to contacting were:
- day rate roughly twice what I would have earned salary
- honest, mercenary working relationship
What do I mean by funny business? I worked in the City of London for a decade, contracting at some fantastic places and with some great colleagues. I would say I was literally the only person I know (of say, 20 colleagues who's affairs I was aware of) who paid tax the entire time. Most never paid any.
An absolute majority of my colleagues entered into the following arrangement, which will be completely familiar to anyone who worked as a contractor in the UK finance sector between 2000/2010:
1. Invoice via an umbrella company which is based offshore
2. Umbrella preferably based inside Europe outside the EU, Northern Cyprus was very common
3. Umbrella company is owned by a trust
4. As a beneficiary of the trust you will be paid a 'loan' roughly every six weeks, since that's not a salary, right?
5. Loans are not taxable.
6. HMRC completely, totally aware of these arrangements.
7. Figure it out, everyone not on PAYE was in on it.
Via this arrangement you can often get 85%+ of your date rate returned to you as 'loans'. I know people who were on these schemes for a decade and dodged in the hundreds of thousands of pounds in personal income tax.
HMRC has sent letters offering to settle cases with 16,000 people, of the people I know I assume they got caught with their hand in the cookie jar for a couple of years, but overall are supremely better off for never having paid tax for the most productive times of their lives.
These are people who often came through state education, drive on state roads, use public services, in the UK which has a rich left/socialist history and have absolutely compunction whatsoever in shirking all and every responsibility they have to contribute in any way.
And as some people in this thread comment - "well, if I wanted to I could write a check to a charity". I heard that so many times from colleagues who had children at local schools, born in the NHS, earning £150k a year, for ten years, who had never pay a cent in tax.
Enjoy being poor plebs, tax is optional. I chose to pay mine.
In the end, some of these people are still my closest friends, we just have very different principles.
I'm relatively wealth in my peer group (disregarding the non-tax-payers who I'm clearly behind). I could be wealthier, but I'm not a fucking parasite.
And I absolutely agree about the advantages. I like the fact that I can work for smaller companies on interesting projects who wouldn't be able to pay the kind of permanent salary I would be looking for, and I like the flexibility and potential for variety. I've always found leaving permanent jobs, even for good reasons, a horrible experience - almost as if you are breaking up with them! - so while I'm in a period of my life where I would like as much varied experience as possible, I think contracting makes sense, as long as you are willing to put in the work a) to deliver good results for clients and b) to keep yourself up to speed with technologies.
One thing I haven't seen many people mention on here is that as a contractor, you're much more responsible for your own personal development. If you aren't a motivated self-learner (chances are, if you are reading HN then you at least somewhat match that description though) then you could easily get stuck doing one set of technology and not learning much new (which suits some people well, of course), as companies are a lot less likely to "take a punt" on a contractor who doesn't know their tech stack - they don't want to invest money in getting someone up to speed who is only there for a short time period.
By the same token, I wouldn't expect any significant training to be provided to you as a contractor, so if that kind of thing is important to someone, maybe contracting is not for them. I've been quite lucky so far and been able to move into new areas/technology based on evidence that I can pick new things up, but some places definitely aren't interested in you unless you are already well versed in their tech stack.
Also, some companies that masquerade as umbrellas are doing some pretty shady things. If they promise some un-feasibly large percentage of take home pay (over 80%) they're probably doing some dodgy Isle of Man scheme and you'll be left holding the can.
Good point about the shady "base pay + loan you never* have to repay" shenanigans - I suspect HMRC will be onto them soon enough though.
Then donate that "optimized" tax money to a charity where it does more good than being pumped in some governmental megaproject that burns most of its funding just on overhead.
Took the words out of my mouth, exactly my thinking
"We can enable you to take home more than 90%!"
"Err, Right, how can you do that then?"
"By structuring your profits through our scheme! We use a combination of tax-haven bank accounts and directors..."
"I'll stop you right there, isn't this what Jimmy Carr off the tv just got spanked for? No thanks, sounds highly unethical to me."
That said I do do things the 'usual' way and pay myself a small salary, with the rest coming in as share dividends. I'm not sure exactly what proportion I pay in taxes vs a salaried employee, but it's non negligible - 20% Corporation tax on all profits (before I get paid), and 25% dividend tax on anything I get paid over the Higher Rate threshold.
If transitioning from PAYE to contractor life (filling in timesheets and other tedia) then the umbrella route is the way to go. You can focus on the job in hand and whatever comes of it. On subsequent contracts there is the opportunity to become your own book keeper and accountant, if you really can be bothered with such things instead of the coding you enjoy.
IMHO the chores of managing timesheets and getting paid are best left to other people, hence umbrella.
As for how much money is needed to get going, with umbrella companies there is an option to be paid early for a small fee, so long as invoices are being paid somewhere down the line. So you don't need to have six months of life savings and insurance stacked up somewhere. You can survive until payday without all that even if the experience is not fun. However, by not spending money you will have more when payday arrives.