Your working options

Your working options

Jun 28, 2018

Working as a contractor can be both exciting and daunting. It’s exciting because you get flexibility in your working life, but daunting because you will have responsibility for finding work and sorting out how you will pay tax.

You may already be aware that as a contractor there are a number of working options available to you. The right approach will depend on your personal and contractual circumstances.

Your Contracting Options

Contracting gives you free rein to choose the type and length of contract you want to work. In some circumstances, the work you would like to perform may only be offered on a particular contractual basis, all factors which need to be considered when making your decision.

  • There are four options available to you when contracting:
  • Being an employee of an umbrella company
  • Working as a self-employed sole trader
  • Setting up your own business by forming your own limited company
  • Working through agency payroll

There are benefits and matters of consideration with each option so you’ll need to carefully consider the implications of each before you decide what’s best for you.

The right choice will depend on a number of factors, including:

  • Your personal circumstances, including your anticipated pay rate.
  • How much responsibility you want to take and the level of risk you are comfortable with.
  • Whether you intend to work for yourself in the long-term and how long your contracts typically last.
  • What set-up costs you’re willing to incur and the administrative burden you wish to accept.
  • Whether the contract you’re undertaking involves you working under Supervision, Direction or Control (SDC). Whether you are subject to SDC largely depends on the manner in which your work will be carried out ie. will you or your work be subject to SDC or does someone have a right to exercise SDC over how you do the work.
  • Whether the contract you’re undertaking falls inside IR35. IR35 is a set of rules that affect your tax and National Insurance if you’re contracted to work for a client through an intermediary such as your own limited company. If HMRC believe that you are working within IR35 then the intermediary has to deduct PAYE and NICs on the payments it makes to you. This will fundamentally alter your tax position.

Limited company contracting

A limited company is often the most tax efficient and therefore financially rewarding way to work. In choosing this route, you’ll become a company director and will therefore need to assume additional responsibilities, including submitting annual accounts to Companies House and tax returns to HMRC. We help lots of limited company contractors to ensure their company and personal obligations are met.

To assess the financial implications of working through your own limited company you’ll need to consider whether you are subject to IR35 legislation for each contract you undertake. We offer unlimited free IR35 reviews as we are well aware that your status under this piece of legislation can change frequently.

Your company would need to purchase the relevant insurance provision for the type of work carried out.

Benefits of limited company contracting:

  • More take-home pay
  • You can expect to take home around 85% of your pay (subject to the salary you take, your IR35 status, your tax liability and National Insurance contributions).
    Protection of personal assets
  • A limited company will give you a level of protection from the threat of personal financial loss if your business fails.
  • A wider range of business-related expenses
  • Your company may be able to offset business expenses such as directors’ salaries, accountancy fees, equipment, software, telephone, travel and subsistence, accommodation, insurance and pension contributions, against income. Tax would then be liable on the net income
  • Control – you’ll have control of your business and potentially more flexibility in determining your work/life balance.

Matters to consider

  • Administrative responsibilities – you’ll have legal obligations as a company director and you’ll have to submit annual accounts and pay corporation tax.
  • Potential to incur penalties – failure to fulfil your responsibilities can result in penalties. You can also be charged interest if your corporation tax is not paid on time.
  • Insurance – you will need to take out insurance relevant to the work you carry out and may need to take out public liability, employers’ liability and professional indemnity insurance. You may also wish to consider income protection insurance, especially if you have a mortgage or other financial responsibilities.

Umbrella company working

Working as an employee of an Umbrella company is a straight-forward way to be a contractor. It involves becoming an employee of an Umbrella company which then contracts out your services to another company or employment agency.

The Umbrella company will calculate your pay after deducting all the costs of employment including tax, National Insurance as well as a pre-agreed amount for being part of the Umbrella company from the money we receive for the work you do on our behalf. You will also receive a wide range of employee benefits while still retaining flexibility regarding which assignments you accept.

Benefits of Umbrella working

  • Ease of use
    You simply submit time-sheets and expenses, where applicable. Your tax, National Insurance and any other lawful deductions (eg payment of student loans, child support orders etc) will be calculated by the Umbrella company.
  • Payment is made promptly
    We will send a text to notify you when payment has been made.
  • Employment rights
    As an employee you are entitled to employment benefits such as sick pay, maternity/paternity pay, holiday pay and pension provision.
  • Insurance
    Our Umbrella company provides personal accident insurance to all employees.
  • Security
    If you are opted into the agency regulations and an end client fails to pay, the Umbrella company still has to pay you for work done.
  • Claim expenses
    Depending upon the outcome of checks to assess levels of Supervision, Direction and Control and whether you qualify as a multisite worker you may be eligible to claim business related expenses. As a multisite worker expenses can be paid tax-free if the employee works at temporary workplaces for the same end client, as part of the same project engagement.

Matters to consider:

  • Less take-home pay
  • Generally speaking, you will receive less take-home pay working through an Umbrella company because it is usually less tax efficient than running your own limited company or being self-employed.

Working as a sole trader

Working on a self-employed basis as a sole trader is likely to be less tax efficient than setting up a limited company (which operates outside the scope of IR35) but easier to administer because you will only have to register with HMRC and produce an annual tax return.

Working through agency payroll

When you work through an agency payroll you are taxed as an employee but only have the status of a worker and therefore are entitled to fewer statutory rights. For example, you will not have the right to be a member of a company pension scheme or build a record of continuous employment. Also, you are unlikely to be able to claim tax relief on expenses incurred while fulfilling your contract when working through agency payroll.

In most cases the hourly rate offered by the agency is lower than you could achieve through other working options.

The payment process is similar to that offered by Umbrella but there are differences. Many agencies don’t offer a contract of employment, so as a worker you are entitled to less statutory rights than an employee of an Umbrella company. You may also have to change agencies for new assignments.

If you think this is the best working option for you, research agencies specific to the industry and sector that you work in to find an assignment.

Benefits of working through agency payroll:

  • Simple administration
    No administration other than completing time-sheets.
  • Automatic deductions
    Tax and National Insurance Contributions automatically deducted.
  • Security
    If you are opted into the agency regulations and an end client fails to pay, the agency still has to pay you for work done.

Matters to consider:

  • Take-home pay
    Lower earning potential as hourly rate offered by the agency is often lower than you could achieve through other working options.

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