Many contractors set up a limited company to trade under as it offers the most tax-efficient solution in terms of retaining as much of your earnings as possible.
There are two main ways your limited company (and ultimately you as a director) are paid by the recruitment agent or client direct; self-billing (covered previously) or invoicing.
When you secure a contract via a recruitment agency, you’ll negotiate how you will be paid at the point of contract negotiations. In the majority of cases, the agency will offer self-billing as it is the most efficient way of managing multiple contractors and there is less of a risk of the client (recruiter) raising discrepancies. You’ll need to ensure that your timesheets and expenses are accurate and signed-off by the client, plus that you reflect the self-billing invoices in your own accounting software.
For some contracts, however, you’ll be paid by invoicing the agent or the client directly. You raise an invoice in the name of your limited company for the required time period that details the agreed rate and hours, plus any expenses you may wish to bill the client (in accordance with the contract). For the majority of invoices, a 30 day payment period is standard, even if you are invoicing the client or agent on a weekly basis.
The client or agent will process the payment and pay your limited company for the services you have provided. The amount due will be paid into your business bank account.
Once your limited company receives payment, it is then up to you to decide how much of the funds you release via salary and how much to retain to pay dividends (after covering any business expenses). We have detailed information about setting a tax-efficient your salary here. Essentially you want to set a salary that ensures you pay enough NICs and satisfy any requirements around proof of income you may need for obtaining credit, but minimise your tax exposure.
You need to pay your salary via a PAYE scheme to ensure you pay the correct amount of NICs and tax on your earnings. You can pay dividends at any time of year, providing you have enough profits in the company to cover the dividend payment.
You need to ensure that you track and chase payments should the agency or client fail to pay on time. Managing this part of the relationship with agencies is critical to ensuring you remain in control of your business and personal cash flow.
Next we’ll discuss managing late payments and other potential issues to ensure you are paid on time and get the most out of your relationship with your agency and clients.