UK Info
Contracting means flexibility at work, and also when it comes to getting paid.
If you're planning to work in London and are considering working on a contract basis, there are a few things to bear in mind. Contractors have two options in the UK when it comes to paying tax and getting paid. You can either form your own limited company, known as a Personal Service Company (PSC), or you can use a so-called umbrella company to do the hard work for you.
The main factor that will affect your choice is a legislation known as IR35. This legislation was designed to distinguish "disguised employees", acting as contractors simply to avoid taxes, from contractors working in a genuine self-employed nature.
Personal Service Companies (PSCs)
Setting up a PSC is the most tax efficient route for a contractor. You're registered as company director and responsible for all the company's affairs and finances. PSCs are easy to set up but there's a fair bit of paperwork involved. Hire a good accountant and they'll do most of the work for you.
Provided your contract falls outside IR35, you can keep your yearly taxes to an absolute minimum. You draw a small salary and are then entitled to receive dividends. These attract a lower tax rate than normal income tax rates.
PSCs allow you to retain control over your finances and to claim on a wider range of business expenses than with an umbrella company.
If your contract is caught by IR35, you must be paid through PAYE (pay as you earn), which includes NI (national insurance), and you cannot draw dividends.
The IR35 legislation is a very complex subject and it's vital that you seek expert advice to ensure your contracts fall outside IR35, or you could face back payments and even fines if investigated.
Umbrella companies
Umbrella companies remove the administration hassles for people who freelance or contract. You just send them your time sheets and expenses. They do the rest.
Umbrella companies pay you through PAYE regardless of your IR35 status, so there are no tax breaks. If your contracts fall outside IR35, your financial returns will be significantly reduced with an umbrella company.
The main point of using an umbrella company rather than just going straight to an agency is that you can claim back expenses.
Umbrella companies charge you a fee for their services. Fees are normally between £15 and £35 per week. A reputable company won't vary the fee they charge according to what you earn
