Following the recent economic climate many previously employed professionals who have found themselves made redundant have made the decision to switch to a future career as a contractor.  There are considerable work / life benefits in opting for this career path but it can seem a little daunting too if you have been an employee for most of your working life.

When starting out as a contractor you are likely to secure your first few contracts through a recruitment agency and therefore we have given you the following information relating to the payment options available to you.

contracting through a recruitment agency

1. PAYE through the agency

In this scenario you become an employee of the agency, which is the more traditional ‘temp’ model.  Tax and National Insurance contributions are deducted at source.  You will be paid weekly or monthly on submission of a timesheet.

This is suitable for short term assignments and is the route that most mainstream temporary workers adopt.  As an employee you are entitled to full statutory rights and benefits and can expect an approximate net take home pay of 66%.

2. PAYE through an umbrella company

Umbrella companies have been around for many years but are relatively unknown to most temporary workers.  Through this model you are employed by the umbrella company and as above Tax and National Insurance contributions are deducted at source (along with the umbrella’s fee).  With this route you are able to reclaim limited expenses which can help to reduce the tax and NI you pay.

This is a tax efficient route if you are only planning on taking very short term contracts or are only temping whilst looking for a permanent role.  Once again you are entitled to full statutory rights and benefits and can expect an approximate net take home pay of 72%.

3. contracting through a personal service company (PSC)

This is the traditional contracting route and allows you to trade through your own limited company.  The Company engages with a client (i.e. the recruitment agency or end client) providing your services, an invoice is submitted for the work carried out and you are responsible for managing your business and personal tax affairs.

As a limited company contractor you claim legitimate business expenses, pay yourself a low annual salary and take dividends on the profits generated by the business.  Dividends are free from National Insurance and as a result you can expect a net take home pay of around 85%.

what’s best for you?

Most contractors choose option 3, however operating through a personal service company is not a decision to be taken lightly.  As the director of the limited company you will have legal responsibilities and will need to commit to the long term running of your company with the intention of making a profit and paying all tax obligations as required.

We have plenty of experience helping contractors decide if this route is for them, including valuable guidance surrounding the IR35 legislation.

Once you’ve decided to take the plunge we can help you incorporate your company, register with the necessary authorities and put the processes in place to maintain compliant accounts from day one.

We will give you the tools required and simple instructions, all you need is a computer or laptop and a few minutes each week. You then pass your records over to us and we’ll do the rest.

To find out more give us a call on 01737 652 852 or submit an enquiry with your telephone number and we’ll call you back!