Payroll Options for Contract Work
Getting paid as a contractor/temporary worker
There are several options open to a contractor/temporary workers in terms of how you arrange your pay.
Payment via traditional Pay As You Earn (PAYE) schemes
Working as a contractor/temporary worker via a recruitment business means being paid in the manner most people are used to. This means getting paid ‘net’ by the recruitment business, with Income Tax and National Insurance Contributions already deducted.
The main benefit of PAYE is that you are covered by the Employment Agencies Act 1972, and you will be eligible for a number of statutory entitlements including holiday pay and statutory sick pay.
The downside is that this option can be the least tax efficient, depending on your situation as your expense deductions will work in the same way as if you were a full time employee of the business.
Payment via your own limited company
When working via your own company your company will be engaged using a ‘contract for service’. You will not to be employed directly by the agency you’re supplying labour services to.
As you are selling your labour without being employed by an agency, setting up a personal service company is an option you can consider. There are, however, important legal issues you need to consider before using this payment method. Research has shown this option is not suitable for 90% of former/retired officers.
How Personal Service Companies work
Personal Service Companies are registered limited companies which supply labour services. The individual becomes a director of the limited company, while the limited company supplies the individuals labour. It then sends an invoice for the completed work.
The money paid by the agency for the services rendered is then paid to the limited company and not the individual. The individual is then able to ‘draw down’ money from the company in several payment forms, such as direct income or dividends. In addition, the individual is able to claim expenses incurred whilst delivering the work and offset these expenses against tax owed.
Personal service companies are very attractive ways for contractors to be paid at first glance, due to their tax efficiency. In most situations, however, the Inland Revenue does not regard personal service companies as acceptable payment schemes for contractors or self-employed workers. This is because they do not comply with Inland Revenue guidelines on the use of personal service companies known as IR35.
IR35 guidelines and advice
A contractor wishing to use a personal service company needs to comply with a series of tax rules which are named IR35. You can view the document here or visit the HM Revenue and Customs website for more information.
In summary, you may only use a personal service company if you are truly in business on your own account, i.e. truly self employed for tax purposes. Indicators of self employment are as follows:
- Has several client organisations that they provide labour services to;
- Does not work under the direct supervision of the employer organisation;
- Does not use the employer organisation’s facilities in the manner of an employee; and
- Is able to replace his/her labour with another individual’s labour to cover work left uncompleted by the SMLC, for example, due to illness.
As a result, most retired officers choose to work via recruitment businesses and directly, because working as self-employed involves meeting the compliance arrangements of personal service companies.
Payment via an umbrella company
An umbrella company is a hybrid. It delivers many of the tax efficiencies of personal service companies, while ensuring the worker is compliant in terms of IR35 regulations. It’s designed to deliver tax efficient payment services for contractors.
You’re employed by the umbrella company, which then sells your labour services via a recruitment business or direct to an employer. On the money side, the umbrella company handles your invoices and payments.
The umbrella company will pay you a salary via the PAYE method to ensure compliance with IR35. Better still; the remainder is put to more efficient use by offsetting your expenses against tax incurred for a period up to 24 months.
To see an example of a PAYE temporary Recruitment Contract please click here.
To see an example of an umbrella company or limited company’ please click here:Back to top ↑