Moving from PAYE to contracting

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osullivj35

Registered User
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Hi

I am moving from a PAYE employee to a day rate contract employee in the IT sector. I am trying this out and have been advised to start off as a director in an umbrella company.

I am looking to get a list of what I need to have in order before I leave the 'security' of the PAYE gig. So far I have
  • Pension
  • Life cover
  • Serious illness cover (Not sure about this?)
Is there anything else I should be looking at?

Should I see an independent financial adviser?

Thanks
J
 
Did this a few years ago by becoming a director in my ltd. Based on the input from my accountant I got an executive pension and income protection set up but that was all, as you probably know one of the advantages of contracting is that you can put much more into a pension and get tax relief.

Out of curiosity, Revenue have guidelines on whether someone is an employee or independent contractor, will you meet them after you move?
 
osullivj35 said:
I am looking to get a list of what I need to have in order before I leave the 'security' of the PAYE gig. So far I have
  • Pension
  • Life cover
  • Serious illness cover (Not sure about this?)
Click to expand...

On the third point, I would suggest it's Income Protection that you need. It's a form of long-term sick pay. Serious Illness cover only covers you for a list of specified illnesses. Income Protection covers you for any illness or accident that prevents you doing your own job. It can be set up to be paid as a trading expense of a limited company.

I'm sure you've already considered this but you should be earning considerably more as a contractor than as a PAYE employee to compensate you for the other employment rights that you're giving up, e.g. paid holidays. If you're going to be paying Class S PRSI, that offers far fewer benefits than the normal employee Class A. Have a look at the social welfare website to see the differences in benefits provided. While some of these aren't as easily replaced as the three you've listed, if you're earning significantly more, then you can set aside a contingency fund.
 
I set up a limited company 10 months ago. My accountant advised a limited company instead of a sole trader, to ensure limited liability, in the event of being sued by my employers for negligence! I set up Income Protection. Cost me around €300 a month. I am 51 and only need the cover until 60, as I will have a preserved pension from then on. I am still really winging it. If you shall be paying your own taxes make sure to get set up for the ROS system (digital certificate etc). If you are going through an umbrella, they'll probably do that bit for you. In terms of tax avoidance, I am still an amateur. Any drawings I have taken from the business account, I've used Sage Payroll to calculate the tax deductions, and then remitted them to the revenue on the ROS system. I am going to meet with my accountant in the early new year to discuss a pension investment or some other strategy to save tax. I am lucky in that I don't need much. I have a preserved pension to call upon in 9 years time. Regarding professional indemnity insurance, I didn't bother, having asked around a number of contractors working in the same company. When you move from PAYE to self employment, it gets a bit "noisier" regarding taxes and other commitments, that you would have taken for granted, as an employee! Any advice you need, just ask.
 
@osullivj35 I have been an independent contractor in IT for over 15 years, both nationally and internationally. Over those years I have seen all sorts of roles come and go, and people enter and leave the contracting space.

Regarding set-up - choice is pretty simple really. Its a director of an umbrella company or set up your own company. The advantage the umbrella company gives you is its ready to move straight away, is a monthly fee and if you don't use it you don't pay. It does work out more expensive if you contract longer term, but if you are dipping your toe in the water it is a good option. I have used it for a while, but recently moved back to my own company.

Secondly, how much of a premium are you being paid above permanent work? What benefits are you losing in the process (outside the PRSI ones) such as health insurance, pension contribution, death in service, income protection, paid holidays, paid public holidays, potential redundancy etc... How many of these can you purchase yourself directly, and how many are simply a cost of contracting

What age are you? what are your personal circumstances? Have you a family? do you plan to stay contracting for 2 years or 20 years? How internationally mobile are you? etc etc etc - be realistic here. The trickier those questions are, the more reserve funds you will need to maintain - either in the company (beware of CT + surcharge) or personal.

How stable is your role? How long is your first contract for? What is the likelihood of it being extended? If you lose that contract, how long before you get another one etc? How long can you handle being out of work for?

How do you plan to keep yourself relevant in the marketplace? What sort of certification/training do you plan to do? How is 'brand me'? What is your linked in profile like? What is your relationship with recruiters like? What is your professional contact list like etc? Go networking and become good at it !

My personal advice is if you wish to contract for a reasonable length of time, set up your own company and pay yourself the same salary you currently get as a permanent employee. Let some funds grow in your company to handle cash flow challenges (not all agencies pay promptly), or if you are out of work, need to go on a training course etc. You can always pay yourself a bonus towards the end of the year if you wish. Just because you are now earning more in the short term, increasing your spending can be very dangerous as you have no idea what will happen when the contract ends. I had one situation a few years back where the company imposed a unilateral 10% cut in the daily rate 3 days before the start of the new contract - take it or leave it option.
Hire a good accountant and get them to do the paperwork for you for the first year - including PAYE, VAT returns etc. Its just easier while you find your feet.

Finally, I see indemnity insurances mentioned above. I never had this until last June when the agency stipulated it as mandatory in the contract and I had to sort it out.

If you want to ask me anything else, feel free to PM me
 
gnf_ireland said:
Before you do anything here, look at the national contractors project by the revenue over the last few years. There is very little flexibility for IT contractors in the revenues view of things.
Click to expand...

Yes. Badly phrased on my part. I merely wish to lower the tax I pay by setting up a personal pension or something like that
 
Hello, Also about to launch myself into Contracting, as I was made redundant before Christmas. I am interested to hear from anyone who has used Contracting Plus or Icon Accounting. In particular the umbrella director solution. Does this solution stand up well to revenue audit or is the contractor director left on the hook for thousands? Any experiences ?

Regards, Sean
 
@SeanElec1 I have used Contracting Plus in the past. I finished up the relationship with them after 7 years last summer, and I was working under the umbrella director solution.
During this time, I was subjected to two 'preliminary' audits as part of the 'National Contractors Project'. Contracting Plus are based in the South West area which was the first under review, and then again as part of the overall national audit.
I had no issues during them, but I always played it pretty fair/safe. I know others who were a lot more creative, and they did get caught.
Before the National Contractors Project, I think the umbrella companies were a bit more flexible with the expenses submitted. After the National Contractors Project, I think they have all completely clamped down and if its not a clear-cut, they simply would not permit it. And it really had to be related to the actual contract you were currently undertaking.
So if you wanted to do a training course in your area of IT that was not directly linked to your contract, they would not allow it under the umbrella company rules. The reason was that if you were in 'grey territory', all other directors of the umbrella company were also implicated by association.

So to answer your question, based on my recent experience with Contracting Plus, the limited amount of expenses they permit should allow you to sail through any revenue audit. I will add while it was not all roses for the 7 years, overall they were pretty good to deal with.


However, if you are intending to contract for an extended duration, and in particular if you expect to have busy/quiet times, I would suggest you give consideration to setting up your own company. My accountant does all the same services as Contracting Plus (VAT, PAYE etc) and approves expenses, but the cost is definitely lower. Feel free to PM me if you need any other detail


Just to point out, the reason I moved away from Contracting Plus was to do with the fact I have been a contractor for the last 15 years and Contracting Plus was not offering me the flexibility I needed to average my salary, invest in my future training needs and in general, control my financial affairs. Their model was simply money in, money out and each month the financial relationship was balanced.
 
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