The best trading options for Contractors

contractor-best-trading-options

Your Trading Options

When you start contracting, you need to consider how you will receive payment for the work that you do. The options available to you are:

  • Your own Limited Company
  • Umbrella Company
  • PAYE through an Agency
  • Sole Trader

We’ll explain the differences between the options, which will help you to understand how they affect you financially and personally, so that you can make the best decision to suit your circumstances.

The main difference between these is your employment status:

  • Limited Company – Director
  • Sole Trader – Sole Trader
  • Umbrella Company – Employee
  • Recruitment Agency/PAYE – Employee

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[tabtext]Limited Company [/tabtext]
[tabtext]Sole Trader[/tabtext]
[tabtext]Umbrella Company [/tabtext]
[tabtext]Recruitment Agency /PAYE [/tabtext]

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Limited Company

Popularity
70%

Effort in setting up and running
80%

Consider it if…

You want to own and run your own company and appoint yourself as a director and shareholder.

How it works

You will be in control of, and responsible for running your own business. You will need to set up your company with the help of your accountant and it involves things like incorporating your company, setting up a business bank account, and arranging insurance cover.

Responsibilities

  • Registering with Companies House and HMRC
  • Appointing a company secretary, who satisfies a legal requirement to record company meetings and perform administrative duties
  • Assign a registered office
  • Raising invoices
  • Recording income & expenses
  • Reconciling your business bank account
  • Making payments to HMRC for income tax, NICs, corporation tax, VAT and completing a self-assessment tax return.

Tax Efficiency

This is the most tax efficient way of operating. Tax planning can be tailored to your circumstances, delivering large savings opportunity.

Risk

Lower personal financial risk. Under limited liability you are a separate entity to your company. For example, it will be your company that enters into contracts and not you, and it will also be the company that is responsible for its own debts.

How you are paid

You will take home more pay than the other options.

Typical take home pay based on an annual income of £104,000 (or >hourly rate of £50)

£88,132

Take home pay between 75% and 80% of your contract value[/tab]

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Sole Trader

Popularity
5%%

Effort in setting up and running
60%

Consider it if…

You want a quick and simple way to get a business going without all the administration and set up costs.

How it works

You may not be able to claim self-employed status if you get work through an agency, or if you do a lot of work for the same company .This is because HMRC will often contend that you are actually an employee of the company or agency you are working for, and not a self-employed contractor at all.

Responsibilities

  • Registering with HMRC within 3 months of commencing trading
  • Making payments to HMRC for NICs, possibly VAT
  • Filing self-assessment tax return each year

Tax Efficiency

You are personally liable to pay taxes on all income earned as well as obliged to pay Class 2 National Insurance, which is higher than the other options.

Risk

Higher personal financial risk. You are personally liable if things go wrong, and your own finances and assets are at risk.

How you are paid

Compared to a Limited Company, you will take home less pay with equivalent turnover.

Typical take home pay based on an annual income of £104,000 (or >hourly rate of £50)

£73,351

Take home pay between 75% and 80% of your contract value

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Umbrella Company

Popularity
10%

Effort in setting up and running
5%

Consider it if…

You just don’t want the responsibility of running your own limited company. A good choice if you are working intermittently.

How it works

You essentially become an employee of the umbrella company who will employ you under a Contract of Employment while you choose the projects you want to work on. You will receive a payslip, your tax will be deducted through PAYE and you will have the same statutory privileges as any other employee.

Responsibilities

  • You submit time sheets to the umbrella company
  • The umbrella company will issue invoices on your behalf for the work you have done
  • The umbrella company collects payments from your client or agency
  • The umbrella company handles all administrative duties normally associated with contracting

Tax Efficiency

It offers little benefit for reducing tax liabilities, although you will be able to claim back some basic expenses such as travel, subsistence, tools, equipment etc.

Risk

Low risk. All tax and NI is automatically deducted so you won’t need to worry about tax returns and budgetary spend.

How you are paid

You are paid as a PAYE employee, less the umbrella company’s fee. Because the bulk of the paperwork and back-office administration is done for you, it’s at the cost of higher fees (up to 9% of your contract value)

Typical take home pay based on an annual income of £104,000 (or >hourly rate of £50)

£63,653

Take home pay between 60% and 65% of your contract value

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Recruitment Agency /PAYE

Popularity
5%

Effort in setting up and running
60%

Consider it if…

You want a flexible career and varied work experience, or if you want to try out the contracting lifestyle without making any major commitments in the short term.

How it works

You become an employee of a recruitment agency. Your salary will be processed through their own payroll as PAYE.

Responsibilities

  • You submit time sheets to the agency
  • The agency will issue invoices to the client for the work you have done
  • The agency pays you a salary after all related tax and other costs have been deducted.

Tax Efficiency

This is the least tax beneficial option because you pay full tax and national insurance contributions on all your earnings. In addition you won’t be able to claim valid business expenses which would help to reduce your tax and NI liabilities.If you work for more than one agency then you will have numerous payroll contacts and will never be on the correct tax code meaning that you will be paying more tax than you should.

Risk

Low risk. You may be able to negotiate a payment schedule and not have any late payment issues. For example if the end client fails to pay, the agency still has to pay you for work done.

How you are paid

You are paid as a PAYE employee of the agency.

Typical take home pay based on an annual income of £104,000 (or >hourly rate of £50)

£59,138

Take home pay between 60% and 65% of your contract value

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The calculations are based on 40 hours per week over 52 weeks claiming £2,600 expenses and 10,400 business miles per annum. HMRC Flat Rate VAT Scheme at 13.5%, directors fee of £192 per week. Limited, Sole Trader and Umbrella figures include the Square Mile Accounting margin. Agency/PAYE includes a rate reduction of 13.8% to accommodate employers NI. Flat rate VAT for Limited is 13.5% providing annual income does not exceed £230,000.

 

If you’d like to talk to one of our online chartered accountants, please request  a complimentary call-back, at no charge here. Alternatively you can call us on: 0203 282 7109.

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