Contractors – what are your options?

This article will explain ways a contractor can engage with an agency and a brief overview of the tax/employment status of each. This will allow you to make clearer and informed choices that best suit your situation.

There are 4 main ways to engage with an agency and each has different employment and tax statuses.

The 3 main employment statuses are

1. Employed
2. Worker
3. Self-employed

The two that are of concern for temporary workers are worker and self-employed. In really simplified terms the difference between the two are in the rights they are entitled to . If you are a worker you are entitled to the same rights as an employee (right to minimum wage, holiday, statutory sick pay, maternity/paternity pay). If you are self-employed you hold no rights at all in this sense.

The next status to consider is your tax status of which there are 2 options

1 – Employed

2 – Self-employed

So when we examine the 4 ways to engage with an agency it is important to determine both statuses for each one.

 1 – AGENCY PAYE

You are effectively employed by the agency and your tax and national insurance contributions (NICS) are deducted for you.

Rights = Worker

Tax = Employed

Positives

-Minimal admin on your part, it’s easy to set up and maintain.

-The agency can’t charge you on top of the standard deductions they make by law

Negatives

• If you work through multiple agencies across multiple end clients it can be confusing for you and HMRC which could result in you being over taxed.
• It can have a negative impact on your credit rating, as it would show no consistency of employer/income. 

2- UMBRELLA PAYE

An umbrella company’s sole function is to employ workers. You will be employed by the umbrella company.

 Rights = Worker

Tax = Employed

Positives

• Quick and easy to set up, similar to agency PAYE with minimal admin.
• No impact of multiple agencies as you employer is the umbrella so stays consistent.

Negatives

• Umbrella companies are unregulated from a legislative perspective so you could be engaged with a non – compliant umbrella who doesn’t make the correct deductions leaving you liable. As a worker you are entitle to an itemised payslip – check it to ensure the expected deductions are being made.
• Agencies can have an approved supplier list (ASL) which mean you may have to have multiple umbrellas which then reduces the consistent employer advantage.
• It’s not free, umbrella deducted the cost of employing you (holiday, employers NICS) and their fees before paying you. 

3 – SOLE TRADERS

You are providing services as a business but don’t have a company.

The agency doesn’t make deductions and pays the sole trader gross.

The sole trader is responsible for the self-assessment annually and pays the tax due directly to HMRC.

Rights = Self-employed

Tax = Self-employed

 Positives

• As you aren’t an employed you don’t pay employee NICS (class 1). You pay class 2/4 instead which is more tax efficient.
• Your take home pay is a bit more than PAYE due to the reduction NICS.

Negatives

• You must save a bit of your earnings to annually pay tax to HMRC which can be difficult to manage.
• It is very admin heavy, with the invoicing and insurance.
• If you make more than ￡85k profile you must register for VAT.

 Sole traders don’t often engage with agencies as the tax legislation requires the agency to make a determination on if you are really self-employed. This is done on the assessment of supervision, direction and control. If they determine you as genuinely self-employed they can pay you gross but if they don’t the agency must make deductions as they would with an agency PAYE worker but you would have none of the rights. So essentially, the worst of both statuses! It is a risk to the agency as an incorrect SDC assessment can leave them financially liable.

4 – LTD COMPANY/PERSONAL SERVICES COMPANY (PSC)

A personal services company (PSC) is the common type of limited company set up by a contractor to provide their services to clients. It usually set up to provide the services of one contractor, who is often the company’s only shareholder and sole director

Rights = Self-employed

Tax = Self-employed/employed

Positives

• If genuinely working outside IR35 then the limited company is paid gross by the agency so is tax and NICS efficient. Net pay is often higher than PAYE/umbrella model.
• Usually, as a rule of thumb, the higher the rate the more it works in your favour. The cut off usually being around ￡25ph. If you earn less than this you normally get a higher take home pay from an agency PAYE/umbrella.

Negatives

• Limited company’s need to pay corporation tax which is about to see an increase to 25%.
• It takes a lot of time to maintain and undertake the admin involved.
• You have a legal obligation as a director and this applies even if you engage with an accountant.
• If the end client deems your role as ‘inside IR35’ your agency will has to make the relevant deductions but you still would hold no ‘workers’ rights so you would in fact be getting the worst of both worlds!

It is important to note that I am not qualified to give advice in this financial area but I can empower you with knowledge to allow you to reach out to the people who can help you make an informed choice for your situation.