| Following the introduction of the IR35 legislation, there | | | | The vast majority of contractors work through their |
| are now only three real options open to contractors, | | | | own limited company, as this is the most tax efficient |
| so let's have a look at each option in more detail. | | | | method, enabling them to keep more of their income. |
| The options available to contractors are as follows: | | | | However, these tax advantages are wholly dependent |
| Option 1 - Umbrella Company (Payroll service) | | | | on whether they fall inside or outside IR35 "rules". |
| An umbrella company is essentially an invoicing vehicle | | | | Contractors who fall outside the IR35 rules will often |
| for contractors who want to avoid the administration | | | | be better off operating through a limited company, |
| duties normally associated with contracting, namely | | | | whereas those inside IR35 will often be better with an |
| issuing invoices, chasing payments from clients / | | | | Umbrella company. |
| agencies, calculating tax and national insurance (NI) | | | | By setting up a limited company you have complete |
| contributions and making payments to their bank | | | | control of the running of your company and its bank |
| account. It's worth noting that because you are | | | | account. Provided your contract falls outside IR35 (i.e. |
| employed by the umbrella company, IR35 legislation | | | | you're not deemed to be an employee of the client |
| does not apply. | | | | using a limited company as a disguise) you may draw |
| Contractors who work through an umbrella service will | | | | dividends from the company that are not subject to |
| submit timesheets and expenses (normally online) and | | | | National Insurance (NI) contributions. |
| then leave the rest up to the umbrella company. They | | | | Many contractors decide against starting a limited |
| will generate and send an invoice to the agency or | | | | company because of the day to day administration |
| client, chase payment when it's due and then upon | | | | and the legal requirements all limited companies have |
| receipt of payment will calculate your tax and N.I and | | | | to comply with. Whilst many accountancy practices |
| transfer your net pay direct to your bank account. | | | | offer services to remove many of these headaches |
| Umbrella Company Providers | | | | (i.e. VAT returns, monthly payroll, annual company |
| Naturally, there is a fee for providing an umbrella | | | | accounts, company formation and corporation tax |
| service which can vary hugely between different | | | | returns), until now a truly comprehensive accountancy |
| companies. | | | | package has not existed. |
| For new contractors the umbrella company is often an | | | | Option 3 - PAYE through an agency |
| appealing option, as it provides an easy and cheap | | | | The last and generally the least favourable option for |
| way to decide if contracting is for you. | | | | contractors is the agency PAYE route. In short, you |
| Many contractors, especially those who are | | | | are employed by the agency so you pay full tax and |
| contracting long term or want the best possible return | | | | national insurance contributions and you are either tied |
| normally decide to start their own limited company, | | | | to working through that agency indefinitely or having to |
| which we will move onto now. | | | | resign and join a new payroll scheme each time you |
| Option 2 - Limited Company (or Personal Service | | | | change agency. |
| Company) | | | | |