Self Employed vs PAYE 20 June 2022 at 10:40AM in Cutting tax 9 replies 113 views

MoneyGeoff

I retired from IT a while ago and have recently started some part time work for a new, small limited company created by my former boss. We are in discussions with an accountant and lawyer regarding a proper employment contract and payment via PAYE but it's taking some time. In the mean time they suggest I register as a sole trader with HMRC and work as a contractor so that I can receive payment. I'll be owed about £5K by the time PAYE is sorted out.

Does that sound like the best way forward? I haven't been self employed before, always PAYE, although I did used to do self-assessment so if that's all that's involved then I'm fine with it. I'm willing to wait a bit longer to receive payment though, so would it be feasible to just wait and then receive back pay via PAYE? Or would HMRC get snarky about that because they didn't receive tax and NI at the time the work was done? Is it fine for the tax and NI to be paid at the time I get paid, even though it is for work done in previous months? 

CKhalvashi

This sounds like an IR35 issue unless you genuinely have the freedom to reject work, subcontract if you want to and offer your services to someone else.

In other words, this is a classic PAYE scenario.

MoneyGeoff

I can rejected work and walk away at any time. In any case, I'm not trying to avoid tax and NI, I'm trying to find the correct way to go about paying it. If I complete a self assessment and HMRC say I need to pay tax and NI at the same levels as a permanently employed person rather than as a contractor, then that's perfectly fine.

DE_612183

You can complete SA and will do so each year, if it was only for a month or so if you have the money I'd be tempted to just let it roll until it's all set up.

MoneyGeoff

Thanks. Yes, there's no urgency for payment and I trust my boss and it's not the end of the world if things don't pan out. My preference would be to wait and receive all payments via PAYE.

Just wondering if there are any pitfalls with HMRC caused by me working for several months without pay and then receiving a lump sum to cover back pay. All the work done is in the current tax year if that helps.

Grumpy_chap

CKhalvashi said:

This sounds like an IR35 issue 

It does, except there is a slight difference in the way the rules are applied, depending on the size of the

MoneyGeoff said:

new, small limited company created by my former boss. 

If that really is a small company, then I think the onus of status determination falls to the OP.

In that case, the OP may be worth considering own Ltd Co and never planning to go PAYE.

MoneyGeoff

Grumpy_chap said:

In that case, the OP may be worth considering own Ltd Co and never planning to go PAYE.

The main reason for going permanent is that I will receive an interest in the new company. We are currently going back and forth with the accountant and lawyer as to the best way to do that which is why it's taking so long. They have various suggestions around becoming a partner, director, receiving equity in the business, profit sharing and so on.

I will be a permanent employee via PAYE. The only question is, what is the best way to receive payment until everything is set up and I have a contract in place.

CKhalvashi

Got you, possibly via a service contract in the interim.

In relation to the shareholding, the best way to structure this depends on your own circumstances. If the shareholding is modest (and so is the investment), (S)EIS may be a way to go about this (restrictions apply). Any financial advice of this nature is far outside the general advice a forum can give as I've spent many years in business but am not an accountant or legal advisor.

MoneyGeoff

Yes, I'll take professional advice on the shareholding part. Thanks for the tip about SEIS.

I'll mention a service contract to by boss and the accountant. Perhaps that has VAT implications though?

I'll probably hold fire a bit longer as this will be a lot simpler if all payments are received via PAYE. 

unholyangel

MoneyGeoff said:

Grumpy_chap said:

In that case, the OP may be worth considering own Ltd Co and never planning to go PAYE.

The main reason for going permanent is that I will receive an interest in the new company. We are currently going back and forth with the accountant and lawyer as to the best way to do that which is why it's taking so long. They have various suggestions around becoming a partner, director, receiving equity in the business, profit sharing and so on.

I will be a permanent employee via PAYE. The only question is, what is the best way to receive payment until everything is set up and I have a contract in place.

If there is no contract, there can be no requirement to make payment.

So, the contracts need to be sorted before anyone can determine:
a) how much is due to be paid
b) when it is due to be paid
c) who and what is due to be paid (employee, contractor, director etc)
d) how it is due to paid and reported (PAYE, gross, dividend)

Whether you're self employed or not will be determined on the facts of the contract and working relationship in practice (not just what's on paper). What I can say is that I've never seen "the employer isn't set up for PAYE" as one of the relevant facts in making the determination of employment status for tax purposes.