How do I pay a Contractor?

If you're the director of a limited company, you're also considered an employee. As such, you may pay yourself a salary through the PAYE scheme-which is similar to how other employees of the company receive their pay.

You'll need to register as an employer with HMRC (even if you're only employing yourself as the sole director of a limited company), set up and run payroll, report to HMRC and abide by HMRC's record keeping requirements.

If you're operating as a sole trader, you can contribute to a personal pension scheme.

If you're a limited company director, you can make pension contributions as an individual (as an employee), as well as through your company (as an employer). For the latter option, your pension contributions are paid directly from your business bank account.

So, you're thinking of becoming a contractor.

There's probably one of three reasons driving this:

You've received a Job Offer

You've just received a job offer, and now need to decide on whether to set up a limited company, umbrella company or become a sole trader (or you may not have the choice in deciding).

You're in the right place.

This guide will walk you through the best company structure for you, accounting support, VAT, business services you need to consider and finding new opportunities.

You want to increase your pay

You'd like to increase your pay by switching from permanent roles to interim/ contractor roles.

Contracting can be very lucrative.

You'll need to be comfortable with a certain level of risk (short notice periods), increased monthly admin (as a Limited Company) and less benefits than being an employee (paid leave, sick days).

However, you'll earn more, get greater flexibility and hopefully grow a consulting business.

Project Flexibility

Getting multiple requests for your services? Amazing.

Setting yourself up as a contractor through a Limited Company means you can start expanding your client base rapidly and work on different projects a few days a week.

You can still set this up as a current PAYE employee of a company, and this can be a great stepping stone to launching your own business.

Let's talk about the right business structure for you.

To pay a dividend, you need to:

• Hold a directors' meeting to ‚Äòdeclare' the dividend.
• Keep minutes of the meeting, even if you're the only director. For smaller companies, this may often be just a case of getting the paperwork completed.
• Issue dividend vouchers.
  

If you're self-employed, HMRC will work out your loan repayment amount from your tax return. You make your repayment the same time you pay your tax.

If you're an employee and your salary is above the minimum amount, your loan repayments will be deducted from your salary by your employer.

Additional repayments can be made through your online repayment account and by card, bank transfer or cheque.

Firstly, we'll start with the services that we provide which covers the critical things you'll need to start and operate your contracting business.

For those just getting started, we provide free company registration on Companies House. This is typically done within 24 hours of submitting your details to Forma. It can take under 5 minutes to provide all your details and we'll just need a proof of ID and proof of address for each of the company directors.

We cover all of your key company filing requirements like annual accounts, confirmation statements, corporation tax and ensuring you meet all filing deadlines.

We also help with your annual Self Assessment which is a requirement for all company directors.

To pay an overseas supplier, you need to:

• Decide on a payment currency
• Select a payment method: There are various payment methods and payment service providers available, including bank transfers, credit card payments, PayPal and TransferWise. When you're choosing a payment method or provider, you need to think about the currencies available, fees, exchange rates, speed of international transfers and payment reconciliation capabilities.
• Obtain the information you need to process the payment: You may need to obtain different types of information from your supplier, depending on the payment method you agree on. These may include their full name and address, bank account number, routing number and branch number and address.

A director's loan is defined as money taken from your company that isn't either of the following:

• A salary, dividend or expense treatment
• Money that you've previously paid into or loaned the company
  

A Director's Loan Account (DLA) is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them.

Director's loans can be used:

• when you need to access money in your company-apart from what you take out as a salary, dividend or expense treatment-for personal reasons.
• for a variety of purposes, such as covering the costs of a home repair bill, travel plans or any unforeseen personal expenses that may arise.

To pay a dividend, you need to:

• Hold a directors' meeting to ‚Äòdeclare' the dividend.
• Keep minutes of the meeting, even if you're the only director. For smaller companies, this may often be just a case of getting the paperwork completed.
• Issue dividend vouchers

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There are various ways to pay your suppliers. Common payment methods include bank transfers, credit card payments and Letters of Credit.

The optimum salary for a contractor to pay themselves in the current tax year is dependent on their overall income throughout the period.

In the instance there is no other income to be considered, it is generally recommended that salary is paid in line with the Secondary National Insurance threshold which is currently £732 per month (20/21).

As a limited company director, you pay yourself through drawing a salary and receiving dividends from your company.

Drawing a salary from your company is fairly similar to how you'll be paid if you were employed elsewhere-you'll run payroll, submit the required information to HMRC each month and receive your salary (after income tax and NIC have been accounted for).

• What is PAYE
• PAYE when self employed
• When to register for PAYE
• Sole trader taxes
• Sole trader income tax calculations
• Limited company dividends & salary
• Dividend tax rates

There are different types of contractor jobs available across diverse sectors. Contractors may be hired to perform services such as:

• Marketing
• IT maintenance and support
• Graphic design
• Recruitment
• Business development
• Catering
• Construction work

Contractors can be self-employed, a worker or an employee. Those who are employed through an umbrella company or an agency could be considered a worker or an employee.

If a contractor is a sole trader or runs a limited company, he or she will then be considered a self-employed person.

"What are the rules around holiday pay?" is a common question often asked by employers.

It can be confusing, as regulatory changes mean that employers now need to consider additional elements when working out an employee's holiday pay.

Simply put, employers now need to include regular commission and regular overtime payments when calculating an employee's or worker's holiday pay.

This is explained in further detail below:

To hire a new employee, you need to:

• Check if your business is ready to hire a new staff
• Kickstart your recruitment efforts. You can recruit employees on your own, or by using a recruitment agency.
• Check that the candidate has the right to work in the UK
• Find out if they require a DBS check
• Check if you need to enrol the employee into a workplace pension scheme. Here's a guide for first-time employers. If you've already hired employees previously, refer to this resource instead.
• Before carrying out salary negotiations, you need to check the National Minimum Wage for different ages and types of jobs. You'll also need to finalise the employment contract, and provide a written statement of employment particulars within 2 months of the start of employment.
• Notify HMRC that you've hired a new employee. Make sure you're aware of the steps you need to take when you start paying your employee.
  

If you're hiring staff for the first time, refer to HMRC's guide on the steps you need to take.