Simply Contracting

If this is your first time contracting it all may seem a little alien to you.  So many questions and decisions are called for, you might need some help in making the right choices?

This guide will help you through what at first glance can seem a little daunting.

When working on a temporary agency contract you have two choices about how to get paid:

PAYE or Limited Company

PAYE

All your income is paid subject to PAYE tax rules and Class 1 National Insurance and is processed by the Agent/Client.  You should note that this does not make you an employee and you do not have the benefit of the usual employment rights such as redundancy and pensions.

Limited Company

This usually attracts a slightly enhanced rate of pay due to the fact that the Agency/Client is no longer responsible for accounting for Employers National Insurance, so this is usually passed onto the contractor in their rate.

You can have your income paid in this way either by joining an umbrella company or a personal service company (PSC).

Umbrella Company

This is where you become an ‘employee’ of the umbrella company with all the statutory employment rights, and the limited company pay rate is paid to the umbrella company.  However, the company takes on the responsibility of paying Employers' National Insurance and this is deducted from the hourly/daily/weekly limited company pay rate.

What are the benefits of operating this way?

Where you intend to continue working on temporary sites you are allowed to claim expenses in relation to your travel and subsistence to and from the site ie mileage and any meals.  If you have to stay in temporary accommodation the cost of the accommodation and resulting subsistence - meals and so on.

The income received by the company, after allowing for Employers' National Insurance, is processed as a mixture of salary which is based on National Minimum Wage; expenses which are paid tax-free; and the remainder as a ‘bonus’ payment which is subject to PAYE tax and NI.

So, in summary, if you intend to move around workplaces, will be travelling a substantial distance to the site or indeed staying in lodgings this is a simple and effective solution that means the correct amount of tax is paid.  This service does carry a charge which varies from umbrella company to umbrella company.

You should note that expenses MUST be incurred in the course of providing the services and must be substantiated should HMRC question their validity.  Where expenses are minimal this may NOT be the most appropriate option, so do take care when looking for a suitable provider.

Also, the Agency Workers' Directive which comes into force from October 2011 is also applicable to Umbrella Companies and this may have implications on suitability following October 2011.

Personal Service Company (PSC)

This is where you set up your own limited company, become its Director and distribute the income as salary, eligible expenses and dividends.

The limited company is paid the enhanced rate and it becomes your responsibility as Director to calculate and pay the appropriate taxes.

The salary element is usually set low eg at either at NMW levels or NI Threshold which maintains basic pension rights; tax-free expenses and the remainder as a dividend.  The salary is taxed under PAYE rules and the dividend taken from the profits of the company is taxed (Corporation Tax) at a reduced rate.   The combination of the reduced tax rates results in a more beneficial tax position but is more complicated and requires more input from you as Director.

How to go about it

1) Set up a company.

This can be done direct through Companies House (details of how to go about this are available at www.companieshouse.gov.uk) or by using one of the numerous company formation agents.  We can recommend 4Business who offer a fast, efficient and cost-effective company formation service.  You need to ensure that whichever provider you use that you obtain the following documents in original format as these are required to open a company bank account:

• Certificate of Incorporation
• Share Certificate
• Memorandum & Articles of Association

2) Open a company bank account.

You can approach any of the banks but most people use the same as their personal account as this makes transfers easier and more cost effective.  You need to have the documents mentioned above before approaching the bank and also take along some ID such as a passport when you meet them.  If you are undecided on which bank to choose we can provide information on most and can make an introduction to a bank contact who understands contracting.

3) Engage an Accountant.

You can use a high street accountant who will charge you for producing your annual accounts and who may or may not provide an on-going service throughout the year with respect to PAYE/NIC calculations and payments or VAT but will charge more for these services if they do.

The alternative is to look for a specialist service; one that can provide you with all the support you need on a day to day basis.  They will provide you with weekly/monthly updates on what you can take out of the company by means of salary, dividend and expenses, and will account for all your company’s liabilities for PAYE/NIC tax, VAT, Corporation Tax.  These specialist companies will organise the set-up of a PAYE and Corporation Tax scheme, registering your company for VAT, acting as your agent in all dealings with HMRC and basically keeping you up to date with the liabilities and responsibilities that come with being a Director.

You are able to offset genuine business expenses against tax, such as company insurance, accountancy fees, travel, accommodation and subsistence, training, specialist equipment and much more.

As a Director you are required to complete a personal Self Assessment tax return each year and you should notify HMRC of your change of status once everything is in place.

One point to note.  Tax is accounted for at basic tax rates and so where your personal income pot exceeds the higher rate tax level, additional tax will be due at the tax year end.  Your accountant should be able to advise on this and how to manage it.

If you’d like more information about operating as a limited company or the issues that you should be aware of when taking this step e.g. IR35, Managed Service Legislation or expenses please do not hesitate to contact us on 08717 033384.