Your Contracting Route – How do you want to operate as a contractor?
You need to be aware of your worker status, if you have chosen to be a worker who contracts out your services/skills rather than work directly for a company under a standard PAYE scheme, then you are not an employee of the company you are currently working on contract to.
Choosing to work as a contractor you have basically three choices on how you operate:
1) Sole Trader: meaning Self Employment. When contracting as a Sole Trader you will find it difficult to get business to business contracts because, most agencies/engagers will only deal with a Limited Company. In fact there is legislation that enforces this. Contracting on a private basis is a different consideration and apart from finding the work does not have the limitations of contracting business to business. You must also be aware of the ‘False Self Employment Legislation’ being introduced by HMRC. As a Sole Trader you must submit your accounts & subsequent Tax return each year to HMRC.
Sole Trader & CIS. If you are contracting within and registered for the Construction Industry Scheme and can show to HMRC’s satisfaction that you are genuinely self-employed, then using a CIS Payroll service is cost effective and compliant as far as HMRC is concerned. (Ontime offer this service). Again you will submit your accounts & tax return each year.
2) Form your own Limited Company, set up a PAYE Scheme to pay yourself a small salary and take dividends from the profits of the company, this is undoubtedly the most tax efficient way of operating, however there is a large administration burden as you will be responsible, as the Director to ensure all regulatory items are complied with, your accounts are prepared, you operate the PAYE payroll correctly, and on time, and, you must check each contract to see if it falls Inside or Outside of IR35 legislation, in short as the director you are responsible for everything, this will eat into to your leisure time as you can normally only do this outside of your normal working day.
You can of course employ an accountant/bookkeeper to perform most of these duties for you, you need to consider that this will not be cheap, so the more you earn the more cost effective this becomes, if you are on a relatively low income from your contracting then this is the wrong option.
3) Operate through an Umbrella Company (Ontime is an Umbrella Company). This allows you the freedom of being a contractor, but, frees you from all Admin & Payroll tasks, you become an employee of Ontime and you are inside of IR35 so no worries about HMRC compliance. You are effectively using the Ontime Ltd Co. structure to operate through as a contractor.
So as a Sole Trader you have costs (Accounting, Tax return & other operating costs).
As a Ltd Company you have costs (Accounting, Corporation Tax return, PAYE & other operating costs)
With an Umbrella PAYE Scheme you also have costs, these being a Processing Fee to carry out your admin & process the payroll on your behalf, we charge £15.00 per weekly payroll. You also must pay Employers NI as your cost
If you are working through an agency, you will have agreed an hourly/daily rate, this rate should include an ‘uplift’ in the hourly/daily rate to offset the costs of our Processing Fee and Employers NI, the rate of pay will also contain an element of Holiday Pay, as most of our employees/contractors are only with us for a short period of time, we pay your Holiday Pay straightaway so if we lose contact with you, you will not have lost any Holiday Pay we have kept back.
All Umbrella Companies must basically operate the same way to be compliant with HMRC (although some don’t and you want to steer well clear).
As you would be an employee of Ontime and within IR35 legislation we must deduct the Employers NIC from you, to pay over to HMRC, as well we must deduct the usual PAYE Income Tax and Employees National Insurance.
You will also see that part of your earnings are shown on your payslip as Holiday Pay this is to conform to the Working Time Regulation (WTR) Legislation. We must also ensure that your hourly rate after certain deductions is at least the National Minimum Wage (NMW).
So there is plenty to consider when deciding to ‘go contracting’ and it is not simple to make sure you are operating within current UK legislation.
In truth the only differences between Umbrella Companies should be the Fee they charge, ours at £15 is very competitive.
Umbrella PAYE Specific points to bear in mind:
You are able to claim certain genuine, business expenses whilst on a temporary work contract. If you do wish to claim expenses then you must keep receipts to prove the expenses are for genuine business expenses. HMRC do check, don’t get caught out it will be expensive if HMRC do not like your expense claims or your (and our) record keeping. Included in our Registration Pack is guide on what expenses you may be able to claim and what rules must be adhered to, to enable you to be allowed any expenses.
PLEASE NOTE: Expenses ARE NOT an addition to your gross pay, they are part of your gross pay, any expenses will reduce the amount of Tax & NI you pay on your Gross Pay, so there will be three elements to your pay
Gross Pay (say) £500.00 is calculated as:
Basic Pay £400.00
Holiday Pay £50.00
Expenses £50.00 (Reduces Tax & NI)
You still only get the original £500.00 (Gross before deductions) and the expense element reduces your Tax & NI costs.
We can only include expenses providing after reducing the basic pay & holiday pay by the expense amount and our fee, you are being paid at least the National Minimum Wage. Generally speaking an hourly rate of less than £8.00 will not allow for expenses, and the lower the number of hours worked the less likely the expenses will be allowable.
National Minimum Wage: We must ensure that we pay you at least the NMW.
This is calculated after the deduction of our Fee & any Expenses you may have claimed. If your expenses were to take your rate below the NMW you will not get the expenses, or at least you may only get a proportion of the expenses that will keep you at least at NMW. This is a regulatory requirement and we must comply with it.
Overall the contracting options available is quite a complex area, and the information given above is correct as to our understanding of current legislation, as legislation can change quickly we cannot be held responsible if any of the above information becomes outdated without our knowledge. The information given above is presented with our best intentions to help you decide which route is best for you. In the end the decision must be yours and we try to help you decide because we want to deal with you honestly. BUT. The end decision must be yours!