Before you start work, often you need to choose a way to to receive your pay (by choosing a tax stucture). Permanent employees for example will almost always choose PAYE (Pay As You Earn) but in some instances where you might be working for a few different employers there may be tax advantages to working in a different stucture. Receiving your pay in the right way can save you money, time and hassle. This page is a brief summary of the various methods, so you know what will likely be best for your needs before you satart paying for expensive accounting advice.
Here are the most common tax structures;
Under the UK PAYE (pay-as-you-earn) taxation scheme, tax will be deducted from your pay by your employer before you receive it.
PAYE (or pay-as-you-earn) is a payroll deduction system in which tax is deducted from a person's income when paid out by the employer. Your PAYE UK deductions will be a combination of your income tax and National Insurance (NI) contributions. National Insurance is a compulsory deduction of a fixed percentage of your earnings that allows you to have access to benefits and services such as the National Health Service (NHS). The amount withheld is determined by a tax code which applies the taxpayer's individual tax liabilities.
The PAYE thresholds (the level of earnings at which tax becomes payable) are:
- £105.00 weekly
- £453.00 monthly
During your UK employment, you will be issued a P60 form at the end of the tax year (like a Group Certificate in Australia with P45s throughout the year). You will need to keep all of these documents if you wish to claim a tax refund.
Working as a sole trader, all of your income is assessable for tax and so a contractor is taxed on their business profits in addition to any other sources of income. Sole traders are self-employed and must complete a self assessment tax return every year. Self-employed people are allowed to deduct business expenses and be taxed on the profit you have made. There is limited flexibility for deferring some of those profits to another year if you happen to have a particularly good year and are taxed at the higher rate.
An umbrella company acts as employer to independent contractors/ temporary workers who work under temporary contract, usually through a recruitment agency. An umbrella company issues invoices to the recruitment agency and, when payments are made the umbrella company pays the contractor through PAYE (although historically the term ‘umbrella company’ has also been used to describe a salary and dividend payment structure as well).
Umbrella companies have become more prevalent since the government introduced “IR35” legislation which tightened the rules surrounding the practice of working through a limited company. When working through an umbrella company, the contractor is paid a mixture of salary and reimbursed expenses. Some umbrella services will arrange employment before a contractor/temporary worker leaves his or her country of origin for the UK. Umbrella companies are usually fully managed services and usually have no start up or close down costs.
A relocation umbrella service is a unique umbrella product (see above for information about umbrella products in general) where international contractors who are coming to the UK for contract employment sign up with an Umbrella company service provider and offset relocation costs, rent, food, travel and other expenses. Because of this, Umbrella company services usually ask contractors/temporary workers who are coming to the UK to register with them prior to leaving their home country.
If the limited company meets the guidelines set out by the UK tax office, contractors working through a limited company will pay the lower (21%) corporate tax. There is a published checklist that an independent contractor should review to see if they are eligible. See “Would I have been an employee of my client”
Over the last year this area has seen a lot of scrutiny by the UK tax office and the rules have been tightened as a result.
What's involved with running your own Limited company.
- complying with all company and other statutory issues, including company law requirements to file accounts and returns to Companies House;
- the calculation and payment of VAT and corporation tax liabilities;
- payroll calculations and returns and various other statutory requirements;
- company administration including raising all company invoices, running a simple spreadsheet or accounting system to record transactions and appoint an accountant to deal with accounts, taxation and payroll matters on your behalf;
- Ensuring the necessary insurances are in place to trade and protect your clients.