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Contract Solution Options

Employment Solutions

We classify contract solutions into two broad categories: PAYE or Limited Company. PAYE is split into a further two options; with one being more advantageous than the other.

These contract solution options are all described in detail below including their key features, advantages and disadvantages.

While providers of each solution will advise there is no risk it is worth remembering, if you're doing the work of an employee, Inland Revenue would prefer you pay a tax rate similar to a permanent employee. Therefore no scheme is completely risk-free and it is important to consider all the options when choosing a solution. The Inland Revenue constantly makes attempts to reduce the number of options available to contractors but, if you structure your affairs carefully, you should be able to achieve a solution that is advantageous to you.

PAYE

Flow

This option involves being a consultant (or employee) to a third party (the contract solution provider). The solution is often termed 'Umbrella' as the providers have a number of people using their service. As a solution it is widely used and there are a number of providers.

You will become an employee of the solution provider (Employer). They work with the recruitment agency that placed you and sign a contract with the company where you physically work. When you prepare a timesheet your employer (the contract solution provider) will bill the agency.

The two PAYE solutions differ with different returns offered under each. We recommend you Contact Us to fully understand these differences.

Advantages of PAYE

  • It enables you to have access to all the money earned from your contract. The return is regarded to be the most favourable of all the available solutions.

  • The solution structure varies slightly but the providers are generally very efficient as their reputation is built on the service they provide.

  • You don't have to deal with IR35 legislation.

  • It enables you to earn a salary, which is useful if you aim to apply for a Highly Skilled Migrants visa in the UK.

  • There is minimal paper work at the beginning of the contract and no further accounting services are required throughout.

  • If you moved to the UK in the middle of a tax year (6th April – 5th April) the income earned in your home country remains assessable there. Only income earned in the UK will be subject to UK income tax.

Limited Company

Limited companies remain a valuable solution option. The introduction of IR35 legislation in 2001 aimed to close this option; however, many individuals are still using them effectively.

In the past, unless you managed your Limited company's entire affairs, it was common for your company to be managed by a Service Company (MSC). A MSC had access to your bank account and performed all the billing. In 2007 MSC legislation was introduced to put a stop this practice and limit their use. MSC's therefore no longer exist; however, individuals still use Limited companies as an effective means to provide a contract solution.

Key features:

In order to avoid IR35 legislation - which aims to reveal the true nature of the relationship between you (the Limited Company) and the company where you physically work - you need to ensure your contract is 'IR35 compliant.'

If the relationship is deemed to be that of an employee the Inland Revenue will override the contract and require you to pay the usual tax rate on all your revenue. The legislation is still in its infancy with only a handful of cases tried in court. What is clear is that with specific clauses in your contract (- a common one states that an alternative person can fulfil your contract work -) it will withstand a legal challenge. Your right to supply another person will be countered by the company's right to veto the person you would 'potentially' supply.

Using a Limited company you will pay 21% corporation tax on profits. After deducting expenses (shareholders wages, etc) you would expect your effective tax rate to be in the region of 18%. Depending on your wage you will be required to register for VAT. If your wage is above £40k your accountant should register you for VAT as you will be entitled to refunds.

The limitation with a Limited company is the distribution of the retained earnings. There are a number of options available. myJobCaddy can outline these but we recommend you speak with your tax advisor to determine the most suitable option for you.

Advantages of Limited Companies:

  • You should procure the services of an accountant although there is a limit to what they can do under MSC legislation. They will charge a set monthly fee. When selecting an accountant compare their fee with the service they offer. Some accountants may have lower fees but charge you for extra services required throughout the year (for example: your company's statutory obligations such as annual submissions to Companies House, VAT returns, etc). In the long run this may work out to be more expensive so it is important to analyse what you are receiving for their fee.

  • Can be beneficial if you are seeking a better return and earn below £60k per annum.

  • It enables you to earn a salary as a director of your company (the amount of which would be set in conjunction with your accountant). This salary is useful if you wish to apply for a Highly Skilled Migrants visa, and need to satisfy the 'wage' points criteria.

Disadvantages of Limited Companies:

  • The initial effort required for set up. You will need to buy a shelf company where the ownership will be transferred to your name; you will need a bank account in the company name; and you will require the services of a lawyer to provide you with an IR35 compliant contract (- although in some cases the agency may provide this.)

  • You will need to manage the invoicing and billing of your end client on a weekly basis. You will be required to retain receipts in relation to your expenses.

  • You may be required to purchase professional indemnity insurance to cover yourself in the event of neglect in your work.