PAYE and Sole Trader Tax

jasmin10

I have been asked by a company whether I would like to be on their books or if they would prefer me to put the work I do for them through my own company (sole trader - not VAT registered)

I asked my business adviser whhich would be better. He said if I wasn't bothered about job security, it would be financially better for them to go through my own company as the PAYE tax is a higher rate than a sole trader rate.

My question is what is the difference. what is the rate of each?.

Another question. When I send my invoices out I want to work out how much tax I will have to put by for each one so that the money will already be there for when Mr Tax Man come banging on my door. Is there a sole trader tax calculator on the net? I have one for PAYE but obviously that won't apply for me now.

Bean_Counter

Oh dear. Whether you are self-employed or employed is not for you or the employer to decide, it is based on the facts of your specific case (or at least HMRC interpretation of it!)

Employer is taking a big risk as this area is really being targeted by HMRC. I work in construction so I know.

Have a look at this booklet and see whether you are likely to be employed or self-employed:

http://www.hmrc.gov.uk/pdfs/ir56.pdf

jasmin10

No, no. I am self employed already as a Sole Trader (registered 1st May). I work from home as a Virtual Assistant. But there is this one client that would like be to work for them for the next 6 months and has given me this choice.

So I was wondering how much in percentages the tax for each was and if there was a big difference. At the moment I do have a few clinets through my company but while I wait for the business to really take off I wasn't sure which, in my interests, would be the better choice.

Snow_Dog

I think that Bean Counter is referring to IR35? rules which were introduced to stop people working full time for an employer and claiming to be self employed and dodging a number of things including tax and NI contributions.

It was aimed mainly at the construction and IT industries, eg you would get an IT consultant working full time at a company 9-5 5 days a week but ending up paying almost no NI contributions. The same went for a builder who might have 20 or 30 "employees" full time on various jobs but because they were all self employed again, minimal tax and NI.

The main thing in you situation would be to show that you do have other paying clients and that you aren't solely working for one company for 6 months.

WHA

IR35 doesn't apply to sole traders, only partnerships and private limited companies.

I agree with Bean Counter, it is up to HMRC to decide whether you are employed or self employed, but having said that, the risk lies with the "employer" not yourself, so if they are happy to take the risk of paying you on a self employed basis, it is their call.

Tax rate is the same whether employed or self employed. NIC for self employed probably is around the same, class 4 rate is 9% for s/e instead of 11% for employee, but self employed also pay £2ish per week class 2 nic, so probably balances out. So basically no difference in rates of tax and nic.

Where the real difference lies is that as a self employed person they should pay you a higher rate, to account for them not being liable to pay 12.8% employers NIC, holiday pay, sickness pay, etc. If you accept the same rate of pay as s/e as you would be paid employed, they are taking you for a mug. You need to be looking at say 20-30% more as s/e than employed.

Another difference is that you have more scope for claiming tax relief on expenses as a sole trader rather than as an employee, such as travelling, meals, contributions towards your home office costs, etc etc.

Your question needs to be to your "employer" - how much more will you pay me to be self employed?

EagerLearner

I am a virtual assistant too and have been trading since 1st January. As a rule of thumb, each invoice I am paid, I put away 20% into savings for tax. Therefore on that basis perhaps your self-employed hourly rate with this employer needs to be an amount based on agreed PAYE rate (you will need to work it out) plus 20% for the tax, plus around £2.20 a week for NI deductions.

devizes18193

what is a virtual assistant and how did you become 1

EagerLearner

Basically I do everything a secretary / personal assistant / admin person does plus Human Resources, presentations, research, event management etc - some of it I do from home and some from client premises. It means I can dictate my hours and also who I work with - no more nasty bosses to contend with! First 6 months were hard as a set-up but now feeling better about it all and very happy.

Debt_Free_Chick

jasmin10 wrote: »

I asked my business adviser whhich would be better. He said if I wasn't bothered about job security, it would be financially better for them to go through my own company as the PAYE tax is a higher rate than a sole trader rate.

Not heard that one before. The amount of tax you pay is exactly the same - but the timing is different.

With PAYE you'll pay tax as you go along. If you put it through your business, you'll not pay tax on it until next year, after you've submitted your tax return.

EagerLearner

So you get to earn interest in a savings account until it is payable.... and.... claim back some of all those lovely expenses that previously you were paying out of your wages.