There are several options open to a contractor/temporary workers in terms of how you arrange your pay. Payroll options are important to every job seeker, hence here is our guide to make the options clearer.
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, which means you’re deemed to be an employee of the recruitment business. This offers entitlement to holiday pay and statutory sick pay, while all temporary employees are entitled to 28 days holiday per year.
The downsides are that it’s the least tax efficient, and as a contractor/temporary worker you are unable to claim for expenses incurred whilst delivering the work.
Working as a contractor/temporary worker you are engaged as a ‘contractor for service’, and are deemed not to be employed directly by the organisation you’re supplying labour services to.
As you are selling your labour without being employed, setting up a self-managed limited company (SMLC) 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% for former/retired officers.
SMLCs 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 organisation for the services rendered is then paid to the SMLC and not the individual. The individual is then able to ‘draw down’ money from the SMLC in several payment forms. This can be organised as direct income or dividends for example. In addition, the individual is able to claim expenses incurred whilst delivering the work and offset these expenses against tax owed.
SMLCs 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 SMLCs 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 SMLCs known as IR35.
In summary, you may only use a SMLC if you are supplying labour services as a consultant rather than a self-employed worker or temporary worker. A consultant is defined as a worker who:
Has several client organisations that they provide labour services to;
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 SMLCs.
An umbrella company is a hybrid. It delivers many of the tax efficiencies of SMLCs, 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.