Hi everyone.

I have got myself a new job. At the moment I am paid in the usual PAYE way but the new job is contract. The agency have said I can go through an umbrella company who will pay my tax and NI or I can do it myself.

Does this mean I have to set up a company? Am I just classed as self employed?

Does anyone work in a similar way? I havent done it like this before so I am a bit unsure to be honest. I am going to talk to an accountant on Friday but I just thought I would put the message to all you guys first to see if anyone had any ideas.

Thanks for any advice.

The employer will probably want / require you to set up a company, rather than just being self-employed. This is because they have the a legal duty to collect PAYE / NI and if HMRC challenge they could be stuffued for the tax asnd NI on the grossed up equivalent of what they pay you. As to having a company, sounds like there's a fair chance (although this will be dependent on the precise arrangements and facts) that you could get caught by the so called "IR35" rules. If so, a pain in the backside.

Congratulations on the new job to start with.

I deal with most of the largest agencies but don't have knowledge of how they pay their employees, but I'm pretty sure that they do pay them as employees, in other words they are not self employed but have tax and NIS deducted at source.

As an employer a few years ago I know I had to be very careful about employing self employed people on a full time basis, in that it couldn't be on a full time basis or we both had to show that they actually could work elsewhere and were truly freelance.

I'd be sceptical to be honest and an accountant would be a very good place to start when asking advice, also have you asked any other agencies what their policies are and is your agency one of the Nationals or just a small local one ?

It's not so much the full-time aspect, as whose direction you work under, whose equipment is used, who decides the hours, if the work is not to standard who rectifies it, can the "worker" substitute another person to complete the work for him if he becomes unavaiable, etc, etc. The particular facts determine the probability of employment or self-employment existing. Ultimately, if push came to shove only the legal system can decide. These people who advertise "IR35 proof" contracts, schemes, etc are doing nothing of the sort. Each case in law rests on the particular facts of the case.

I'd also add that going back the other way, from self employed to PAYE is a simple enough procedure made extremely complicated by the cretins employed by HMRC who seem to keep no records of the fact, even though seven years down the line you're sick and tired of telling them, although in their defence it is a different office and region of the country who write EVERY time.

Self employment is not to be entered lightly if you've never done it before, it takes a lot of discipline to do the accounting EVERY week and to ensure that you don't spend the tax set aside in lean weeks, I'd think very hard before going back there although I appreciate that in these circumstances you probably don't have much choice.

I dont have much choice really. I didnt want to go through the third party (umbrella ) really as im coughing up money for someone to make a couple of payments every week. Its just that I wasnt sure how complicated it all was. I will see the accountant though and see what he says and what he advises for the best.

Quote ="Karlos"I dont have much choice really. I didnt want to go through the third party (umbrella ) really as im coughing up money for someone to make a couple of payments every week. Its just that I wasnt sure how complicated it all was. I will see the accountant though and see what he says and what he advises for the best.'" An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me.

Quote ="Karlos"I dont have much choice really. I didnt want to go through the third party (umbrella ) really as im coughing up money for someone to make a couple of payments every week. Its just that I wasnt sure how complicated it all was. I will see the accountant though and see what he says and what he advises for the best.'" An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me.

When was the last time you worked as a contractor?

Can't add anything to the discussion but Congratulations on the new job mate. See you at the Keepmoat next season (if not before).

I am always sceptical about these "contracts" that these organisations produce. Standard contracts will invariably fail if challenged robustly by HMRC.

I'll ask you again, when was the last time you were a contractor?

Never.

But, I'll ask you a question - when did you last study the law in this area?

That is what I pay an Umbrella company for, it is the only way to work if you fall under the IR35 directive, a directive which is the clearest bit of legislation HMRC have ever devised BTW.

It is quite clear if you fall into one of the IR35 list of employment, if you do you can either work as a contractor under PAYE on a short term contract or as a contractor working for an agency which is what an umbrella company is, you can not be self employed and many companies will no longer deal with self owned limited companies. There is very little grey in this area and very little that HMRC will pick apart if you use a reputable company.

Quote ="Big Graeme"An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me.'" Thanks for the tips BG. Like i say im going to speak to quite a few different people (accountants and umbrellas) to see what is best. Just one other question. I saw on one site a write up on the pros and cons of umbrellas , sole tradering, etc and a couple of them said "not advisable if you will earn over 35k". Why is this?

Quote ="Big Graeme"An umbrella company will (or should) save you their fee every month, they will keep you 100% compliant with current legislation and do all your taxes for you, all you do is fill in the expenses forms and away you go. Piece of cake to set up and they deal with invoicing and contract details for you. As far as HMRC goes you appear to be working for the umbrella company and no yourself. I use www.orangegenie.com they deal with people in your situation everyday, I found them to be top class, in fact they chased one debtor all the way to the small claims court for me.'" Thanks for the tips BG. Like i say im going to speak to quite a few different people (accountants and umbrellas) to see what is best. Just one other question. I saw on one site a write up on the pros and cons of umbrellas , sole tradering, etc and a couple of them said "not advisable if you will earn over 35k". Why is this?

Cheers Gary thanks for that and see you soon mate!

You need to find out if your job role comes within the scope of IR35, if it does then umbrella or PAYE agency is the only thing you can do regardless of what you earn, if it falls outside or IR35 then sole trader limited company can and usually does work out more tax efficient.

An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company.

"It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client."

The £35k figure is important because that is the threshold for the basic rate of tax at 20%. Anything you earn over £35k will be taxed at 40%.

So, if you earn £50k then on PAYE you'd pay 20% tax on the first £35k and 40% tax on the other £15k.

In a limited company you would pay yourself a salary of say £34,999 to make sure you are a basic rate tax payer. Then, assuming no other costs, your company would have a pre-tax profit of £15,001 (i.e. £50,000 minus £34,999). The company would pay 20% corporation tax at that level of profit. So the £15k profit becomes £12k after tax.

Because you are a basic rate taxpayer, you can then pay yourself a shareholder dividend of the £12k completely tax free.

As an example, a person on £50k on PAYE would have net earnings of around £35k after tax and NI. A limited company on £50k would give you net income of around £38.5k.

But as BG says, you must be very wary of the IR35 rules otherwise you could end up with a substantial bill for back tax.

If you pay yourself the £12,000 dividend in the same fiscal year as you take the £34,999 then you will NOT remain a basic rate taxpayer. The dividend will create a higher rate personal tax liability of £3,000 payable via your self-assessment Return.

Quote ="Dally"An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company. "It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client."'" I should have used the word band rather than list, a decent explanation of current IR35 implementation is here www.hmrc.gov.uk/ir35/guidance.pdf IMO there are ways of avoiding the charges an umbrella company make but for the average contractor the benefits outweigh the costs, they will use HMRC best practice advice to keep their clients compliant with tax law without the contractor having to be (or employ) a tax expert. An accountant may be able to save a few quid when compared to an umbrella but that may involve flying closer to the sun than I am comfortable with.

Quote ="Dally"An umbrella company is not the only way to work in respect of earnings from relationships caught by IR35. You can operate through your own company. "It is quite clear if you fall into one of the IR35 list of employment" - what list is that? There is no specific list. It comes down to the specifics of the relationship between contractor and "client."'" I should have used the word band rather than list, a decent explanation of current IR35 implementation is here www.hmrc.gov.uk/ir35/guidance.pdf IMO there are ways of avoiding the charges an umbrella company make but for the average contractor the benefits outweigh the costs, they will use HMRC best practice advice to keep their clients compliant with tax law without the contractor having to be (or employ) a tax expert. An accountant may be able to save a few quid when compared to an umbrella but that may involve flying closer to the sun than I am comfortable with.

If you time things right you can have the dividend tax free and then adjust salary for the new year to take into account the income derived from it and get maximum value from your basic rate allowance.

Yes, but if you consistently earn £35,000+ that does not work if you wish to draw all the money out.

Well it might not be on the Vodafone scale of tax avoidance but this is certainly no different from a moral standpoint. More legalised tax avoidance.

This is the quandary i have to be honest. Would this mean I would be better paying myself 35k a year and then leaving the rest of my earnings in the business account or would i then be hammered for other taxes etc.

Sorry if these are obvious questions everyone but its the first time ive had to work like this.

Thanks for all you posts as well everyone!

Wouldn't a limited company also have to pay VAT on the services it provides?



Yup. Just like paying into a pension by salary sacrifice or the various Income Tax allowances and reliefs. There are [iloads[/i of legalised methods of tax avoidance. None of which are any different from a moral standpoint.