There have been many legislative changes in recent years but how do they really affect you when placing a contractor or freelancer?
Contractors now only have two options:
1. Work through a PAYE Umbrella Company and have all of their income tax and national insurance contributions taken care of.
A PAYE Umbrella service is where the contractor becomes an employee of the Umbrella Company and is contracted out to provide their services to the client.
2. Operate through their own Limited Company, where the contractor has to take care of all of the financial and administrative responsibilities of running their own business.
Contracting through a Limited Company is a very tax efficient solution but there is a certain amount of paperwork involved and does require more work than using an Umbrella Company.
Will operating through a Limited Company avoid the Agency Workers Regulations?
Quite simply - no! In order to be outside the scope of the AWR, the individual needs to be able to prove that they do not work under the supervision, direction and control of the end client; this cannot be established by inclusions in a contract but is determined by working practises.
Do you have contractors still operating through an MSC?
If you still have a contractor operating through an MSC, you must advise them to change immediately as potentially the debt transfer legislation could be applied to any third party involved in the chain.
Which Option is best for my Contractor?
A full review of the pros and cons of operating through an Umbrella Company and Limited Company can be found below:
|PAYE Umbrella Company||Limited Company|
|Very easy to use, you simply enter your timesheet and expense details and wait to be paid.||The most tax efficient way of working.|
|All tax and NI is deducted before you receive your money, so you will have no further taxes to pay.||You keep complete control of your financial affairs.|
|Ideal for short term contracts||Access to the Flat Rate VAT scheme.|
|Perfect if you are unsure if contracting is for you and you’re really just in between permanent jobs.||Running your own business isn't difficult (it may be time consuming but it isn’t hard).|
|Most importantly someone else will be doing all the paperwork.||Greater opportunity for tax planning than PAYE Umbrella|
|Your salary will be subject to full PAYE Tax and NI.||There is much more paperwork involved|
|You are reliant on the umbrella company to collect your money from the client or agent and then to pay it to you. ContractorUmbrella will chase any overdue payments, on your behalf, free of charge.||Can be costly if you contract for a very short period of time and than go back to permanent employment.|
|Not ideal for low earners.|