IT Freelance, sole trader or limited company?

S

Springers

Registered User
Messages
24
Hi,

Long time reader and occasional poster. Please excuse my English as I'm a foreigner.

I'm currently PAYE worker in IT (52k). I have a potential to earn 600€/day as a contractor for the same job/position. Contracts should be 12/18 months renewable.

I am seriously thinking to start working as a freelance as it will boost my income. In my opinion risk is quite low as I only need a room with a computer and a desk as assets.

Now I have the following questions:

  1. My client will be based in a EU country, is there a chance to create a limited company?
  2. If so, in terms of income which one between sole trader and limited company would be more beneficial?
  3. My main goal would be to retire early. Pension is also an important point in the equation. I have a DC scheme with my current employer (my contribution:6%, employer contribution:8%). In terms of pension, which one between sole trader and limited company would be more beneficial? is there a limit in terms of contribution?

I know that I should obtain professional advice from a reputable accountant or tax advisor before I start my business but I would like to have AAM contributors' opinion before.

Thanks in advance for your help.

Springers
 
A lot of companies will only deal with IT consultants who have a limited company and will not deal with sole traders. You can set up your own limited company or use an umbrella company who will run payroll for you for a fee.

Under the limited company option, there is greater scope to make bigger pension contributions.

Steven
www.bluewaterfp.ie
 
Agree with Steven. Very few clients will work with a sole trader.

Your best options are likely to be either:

1. Set up your own Ltd company
2. Work within a Director's Umbrella structure

A true Umbrella company will incur much higher PRSI rates. Avoid any structure that involves 'offshore'.

They broadly have the same taxation regimens. No 1 will be a little more expensive to operate but will give you more flexibility if you want to undertake business activities beyond simply selling services at a daily rate.

I'm unsure if I'm allowed to make recommendations for an accountant, but if someone can confirm, I'm happy to do so.
 
Also in terms of pension, with a Ltd company (either your own or a Director's Umbrella) your ability (or your company's ability) to contribute to an Executive Pension is enormous in terms of limits, typically over 100% of salary.
 
@Steven Barrett @time to plan Thanks for your response.

With a daily rate of 600€ and a monthly amount of 1500€ net needed as a salary, I'll do the math and see how much I can contribute for the pension for a full year (230 days) as an IT consultant. I'll then compare it with my current DC plan (33% of my 52k gross salary, 19% AVC + 6% employee contribution + 8% employer contribution).

Also if the limited company provides to myself a salary of 1500€, I assume I would contribute PRSI for the state pension?
 
Not many contractors work 230 days per year. I plan on 220 / year if I have a long-term client, and less if I'm going to need to spend time between contracts each year, looking for the next contract.
 
Last edited:
I made an attempt to do the math:


Current job​
Ltd company​
Annual salary​
Gross: 52k
Net: 31.2k		> annual profit: 600 euro x 220 days = 132000 euro

> I might decide to pay myself as a limited company at the standard rate band level (i.e. €44300, I am married with joint assessment) so that I only pay standard rate income tax (20%)

> Net annual salary: 37.3k
Contributing for state pension?​
Yes​
Yes​
Private pension annual amount​
> I have a DC scheme with my current employer (my contribution:6%, employer contribution:8%, AVC: 19%)
> Annual pension contribution: €17160 euro
I then decide to contribute the balance of my profits, €87,700, into a pension. I will not pay any tax on the pension contribution, and the ltd company will now show Nil profits and will therefore not pay any corporation tax


It seems a no-brainer both in terms of net salary and pension. I am also aware that accountant fees and expenses need to be deducted from the profit. Expenses for an IT consultant are quite low and accountant fees won't make a big difference.
I know that I can have gaps between contracts. The worst case scenario would be to not find another contract after the 1st one. In this case, I would be able to rejoin my current company with the same salary and position hence the low risk in my opinion.

Am I missing something? is it too good to be true?
 
Couple of points as an IT consultant with a ltd.
  1. From Revenue perspective, you don't get to choose whether you're an employee or self-employed/freelance as per their guidelines
  2. Executive pension contribution limits are generous but nowhere near 200% of salary, you won't be able to contribute €87k on a €44k salary
 
Springers said:
Hi,

Long time reader and occasional poster. Please excuse my English as I'm a foreigner.

I'm currently PAYE worker in IT (52k). I have a potential to earn 600€/day as a contractor for the same job/position. Contracts should be 12/18 months renewable.
Click to expand...
Hi,

There is a massive disparity between the permanent salary (52k) and the contract (132k) for the same job/position. Are you sure about this 600 per day rate? I could understand short-term contracts paying large premiums, but for longer term contracts (12/18 months) I would expect them to be closer to the permanent rate..

Firefly.
 
zephyro said:
Couple of points as an IT consultant with a ltd.
  1. From Revenue perspective, you don't get to choose whether you're an employee or self-employed/freelance as per their guidelines
  2. Executive pension contribution limits are generous but nowhere near 200% of salary, you won't be able to contribute €87k on a €44k salary
Click to expand...


Thanks for the clarification. For a gross annual profit of €132,000, let's say I reverse an annual net payment of €44,000 to myself as self-employed. To make things easier, we can assume that the tax rate is roughly 50%. I would then need to substract €88,000 from the gross annual profit to reach an annual net payment of €44,000. The remaining €44,000 will contribute into an executive pension.

Conclusion: Net annual salary of 44k and Annual pension contribution of 44k
It's still a no-brainer if I compare these figures to my current salary, am I correct?


Firefly said:
Hi,

There is a massive disparity between the permanent salary (52k) and the contract (132k) for the same job/position. Are you sure about this 600 per day rate? I could understand short-term contracts paying large premiums, but for longer term contracts (12/18 months) I would expect them to be closer to the permanent rate..

Firefly.
Click to expand...

Indeed, you're partially right. I won't find a €600/day rate in Ireland as my profile (English speaker with virtualization IT skills) is quite common.
However, the story is different in France where I am originally from. The demand is greater and my profile (mandatory French native speaker + English speaker with virtualization IT skills) is rarer hence the 600 per day rate.
My main concern is that these French companies won't give the contract to a freelance who is based in Ireland (despite the mission being offered in full remote).
 
Springers said:
Thanks for the clarification. For a gross annual profit of €132,000, let's say I reverse an annual net payment of €44,000 to myself as self-employed. To make things easier, we can assume that the tax rate is roughly 50%. I would then need to substract €88,000 from the gross annual profit to reach an annual net payment of €44,000. The remaining €44,000 will contribute into an executive pension.

Conclusion: Net annual salary of 44k and Annual pension contribution of 44k
It's still a no-brainer if I compare these figures to my current salary, am I correct?
Click to expand...

Allowable executive pension contribution will likely be higher depending on age, current pensions, etc. and tax won't be 50% but seems like an easy decision indeed, maybe biased here having done similar sums for myself in the past.

Springers said:
My main concern is that these French companies won't give the contract to a freelance who is based in Ireland (despite the mission being offered in full remote).
Click to expand...

Can't see this being an issue having invoiced companies in other EU countries, from their perspective the only difference in the invoice compared with French-based freelancers should be VAT rate. Would be much more complicated if you were an employee of a French company of course.
 
You must log in or register to reply here.
Back
Top