Contract Work Pay (PAYE/Umbrella/PLC)

Baileyborough

Hi all,


I'm soon going to be making the jump from working as a permanent Health IT professional to the scary world of contracting.


Now, at the moment, I'm just going to be working and paying tax using PAYE. However, I've also been told the other options (which may be better) are to set myself up as a company, or work with/under an umbrella company.


Can anyone please explain to me like I'm a complete moron what these options are/how they work/the pros and cons of either?


Also, from the PLC perspective, where on the spectrum of "Illegal" to "Good Gamesmanship" does it sit?


Thanks in advance,


C

InsideInsurance

You have two options:

Umbrella
Ltd

A normal umbrella you are PAYE of the umbrella company. There are some dubious ones that use loans, investment or offshore techniques to reduce your tax liabilities etc but even with these the majority still have you as employee on NMW and the rest of the money comes from dodgy routes.

Ltd, not PLC, is the other option - both are incorporated bodies but one is privately traded shares and is typically small-medium companies where as Plcs have publicly listed shared on FTSE etc and will always be of a larger size because of the legal requirements to become Plc

Ltd is perfectly legal, there is however a risk that you may be considered "inside IR35". This doesnt make anything illegal but sets rules about what percentage of the profits must be taken by you as salary rather than being able to take things as dividends or having partners as part time staff etc. If you can be outside IR35 then you can pay less to HMRC.

getmore4less

the key is to understand the difference in tax/benifit of the three options so you get the rate of pay right.

The key ones are

PAYE you get paid holidays and other benifits.

Umbrella you pay the employer NI

Ltd, the main savings are NI, the tax is the similar in most cases.

in the above order you can offset more expenses.

To go from PAYE to umbrella you need at least a 25% uplift in rates.

If a long term thing then Ltd usually works out best and costs(acountant) about the same as umbrella(margin)

If you are going to be working away from home then PAYE can be a problem unless you get the expenses paid seperately.

InsideInsurance

getmore4less wrote: »

the key is to understand the difference in tax/benifit of the three options so you get the rate of pay right.

The key ones are

PAYE you get paid holidays and other benifits.

Umbrella you pay the employer NI

Ltd, the main savings are NI, the tax is the similar in most cases.

in the above order you can offset more expenses.

To go from PAYE to umbrella you need at least a 25% uplift in rates.

If a long term thing then Ltd usually works out best and costs(acountant) about the same as umbrella(margin)

If you are going to be working away from home then PAYE can be a problem unless you get the expenses paid seperately.

That assumes you are PAYE of the client, ie Fixed term employee.

With an umbrella you are still PAYE, just with the umbrella company rather than client. You do technically get holiday but most of the time this is paid as an "allowance" for each day worked rather than actually paid for the days you dont work but many umbrellas do give you the option of either.

For anything to do with umbrellas your day rate has to cover all the costs so if you choose to get paid holidays you get less take home for each day you do work but you do get paid holiday so effectively smooths out the curve if you are one of the odd contractors that takes holidays.

Ltd companies can be more tax efficient than simply saving of NI depending on your personal circumstances and your plans etc. For example a former colleague went contract for just a couple of years, left virtually all the money in the company and then went back to being perm so liquidated his company getting the money out with the entrepreneur relief on the money which was massively more tax efficient than just saving NI

getmore4less

InsideInsurance wrote: »

That assumes you are PAYE of the client, ie Fixed term employee.

With an umbrella you are still PAYE, just with the umbrella company rather than client. You do technically get holiday but most of the time this is paid as an "allowance" for each day worked rather than actually paid for the days you dont work but many umbrellas do give you the option of either.

For anything to do with umbrellas your day rate has to cover all the costs so if you choose to get paid holidays you get less take home for each day you do work but you do get paid holiday so effectively smooths out the curve if you are one of the odd contractors that takes holidays.

thought I had answered this before.

The holiday pay comes from your own earnings as does the employers NI

You need an uplift from direct PAYE of 12.07% for the holiday and 13.8% for the employers NI you will be paying yourself.

all you do with an umbrealla is take your rate and pay them a fee to split it up so you look like an employee with a few expenses paid tax free.

As an employee of an umbrella you should not work for at least 5.6 weeks a year, the statutory holidays and the umbrella should enforce that.

anyusernameleft

What happened to Self Employed?

I've been Self Employed for years and it's fairly straightforward without big fees to Umbrella companies (avoid Umbrella companies) or accountants.

Its perfectly legitimate and not hard to learn to keep your receipts and save up for your tax bill.

InsideInsurance

anyusernameleft wrote: »

What happened to Self Employed?

I've been Self Employed for years and it's fairly straightforward without big fees to Umbrella companies (avoid Umbrella companies) or accountants.

Many clients wont take self employed contractors due to the risk that HMRC decide that despite your contract you are actually an employee and so they get hit by a retrospective bill for Employers NI and you suddenly get a load of employee rights.

With Ltd or Umbrella you are legally an employee of them and so the risk to the client disappears.

Harold_Wren

I'm currently in a similar position, I've been a long term temp (nearly a decade) through an employment agency and I've been told with very short notice I need to go self employed for which the agency are pushing me to use an umbrella company. As well as an agency there is another company in between the main company I actually work for which seems to handle the timesheets, they take a cut of my pay as do the employment agency and both are wanting more money from the main company who won't pay that. I should also note that despite being in this role for eight years, I've never had a pay rise.

I've looked into the umbrella companies and it looks to me like I'm going to be worse off as there will be a third company taking a cut and some higher costs along with that, the posts above seem to agree with that. I'm looking into the ltd option which seems to possibly be better financially after some hassle setting up but I'm concerned about the posts that say the HMRC don't like this as it's not really self employed - I work a single job in the same office and all equipment is provided. Furthermore there doesn't seem much I can write off, I cycle to work, I don't wear a uniform, I don't buy lunch and I don't have to buy any assets for work either.

Are there any guides to setting up a Ltd company people would recommend? I've had a look but I keep coming across various companies offering their services instead. Is there anything else I should consider?

Thanks

sandycalling

Harold, sounds to me like you might fall inside IR35. Therefore you will not necessarily be financially better off setting up a limited company, than if you just used an umbrella company.

Worth working out what your take home pay would be using an umbrella company vs. a limited company worker inside IR35. You can find some calculators online that will help you work this out.


Don't forget that if you set up a limited company you would also have on-going outgoings for an accountant etc, so it won't just be a one off cost setting up. You will also be responsible for invoicing clients, chasing payment and the like.

agrinnall

You'll definitely be worse off than you currently are working through an Umbrella company unless you negotiate an uplift in your rate, as mentioned by gm4l in post #3. The same is almost certainly true for limited company from what you describe (possibly more so as the fixed costs can be higher). Brush up on your negotiating skills now!

Harold_Wren

Thanks for the replies although I'm surprised you think I'd be the same with an umbrella company and a limited company, the information I'd read suggested I'd be better off with a Ltd company but it would be a bit more hassle and only worth it for a longer term job. A workmate in the same role and pay as me currently works through an umbrella company and they take a hefty cut from him which has put me off umbrella companies however aside from getting the fixed costs I don't have a more concrete idea of how much the Ltd company is going to cost.

The umbrella companies all seem to claim how great they are and how little money they take but the reality seems quite different particularly if you can't maximise expenses. Similarly I'm being told how great a Ltd company will be, in theory it seems to me the Ltd company should be better as rather than paying a company every week to do the accounts it will be once a year (still not cheap I know) and the NI should be less as well.

Unfortunately an increase in rate is not on the cards as there's no budget for it, I have considered the more straightforward option of going with an umbrella company for now and looking for work elsewhere but there's not a lot of work in my field where I am and the type of work (IT) seems largely self employed anyway.