What are your options as a New Contractor?
So you’ve decided to make the jump into the world of contracting. The benefits of being your own boss, having the freedom to choose when and where you work and above all the opportunity to earn significantly more money, are all too good to pass up. Well, congratulations you’ve done the hard part and made the decision, now it’s time to start planning.
One of the first decisions any contractor needs to make is how to structure their new business. This decision has long been affected by the introduction of IR35, a piece of legislation introduced to tackle tax and National Insurance (NIC) avoidance schemes. The Inland Revenue’s view was that many IT consultants and engineers were often treated as self-employed, when really they should have been treated as employees of the end client, and therefore should have tax and national insurance deducted from their earnings. For a detailed explanation of the IR35 legislation along with information on how to determine if it will affect you please read the Contractor UK IR35 Compliance guide.
Following the introduction of the IR35 legislation, there are now only three real options available to contractors, each with different benefits depending on your situation and contract.
The options available to contractors are as follows:
An umbrella company is essentially an invoicing vehicle for contractors who want to avoid the administration duties normally associated with contracting, namely issuing invoices, chasing payments from clients / agencies, calculating tax and national insurance (NI) contributions and making payments to their bank account. It’s worth noting that because you are employed by the umbrella company, IR35 legislation does not apply.
Contractors who work through an umbrella service will submit timesheets and expenses (normally online) and then leave the rest up to the company. They will generate and send an invoice to the agency or client, chase payment when it’s due and then upon receipt of payment will calculate your tax and N.I and transfer your net pay direct to your bank account.
Naturally, there is a fee for providing this service which can vary hugely between different companies. Norla Basics, our low cost umbrella service offers a simple, cost effective payroll service for just £60 a month.
For those contractors who will need to claim back expenses we offer Norla Services, an umbrella service which has an Expenses Dispensation in place. This simply means that you can claim relief for your subsistence and overnight accommodation without the need to submit receipts (although we recommend you do keep hold of them for your own records).
For new contractors the umbrella company is often the best option, because it provides an easy and cheap way to decide if contracting is for you. Many contractors, especially those who are contracting long term then move on to start their own limited company.
2. Limited Company
The vast majority of contractors work through their own limited company, as this is the most tax efficient method, enabling them to keep more of their income. However, these tax advantages are wholly dependant on whether they fall within or outside IR35 “rules”.
Contractors who fall outside the IR35 rules will often be better off operating through a limited company, whereas those inside IR35 will be better with an Umbrella company.
By setting up a limited company you have complete control of the running of your company and its bank account. Provided your contract falls outside IR35 (i.e. you're not deemed to be an employee of the client using a limited company as a disguise) you may draw dividends from the company that are not subject to National Insurance (Ni) contributions.
Many contractors decide against starting a limited company because of the day to day administration and the legal requirements all limited companies have to comply with.
3. PAYE through an agency
The last and in this case the least favourable option for contractors is the agency PAYE route. In short, you are employed by the agency so you pay full tax and national insurance contributions and you are either tied to working through that agency indefinitely or having to resign and join a new payroll scheme each time you change agency.
If you require any more information or would like a free 'no obligation' illustration of your possible income using these different options, please call one of our dedicated Advisors on 0870 609 3517 or email customerservices@norlagroup.com.
