PAYE and Managed Service (LTD) Companies
Once you start work in the UK, you can choose between a couple of different ways to receive your pay. The most common method companies use is PAYE (Pay As You Earn)
Whilst some company structures were a popular choice for many contractors working in the UK wishing to maximise their after-tax earnings, the benefits of using them have mostly disappeared since new legistation was introduced in 2007.
PAYE Tax
The most common taxation status for Aussies, Kiwis and Springboks working in the UK is the PAYE (Pay As You Earn) taxation scheme, where tax will be deducted from your pay, by your employer prior to you receiving your pay.
Your PAYE 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, allowing you to have access to benefits and services such as the National Health Service (NHS).
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 and. You will need to keep all of these documents if you wish to claim a tax refund.
Limited (Ltd) companies and other company structures
New legislation for the 2007/2008 tax year
For many years, company structures were a popular and financially-rewarding choice for contractors in the UK. Many people chose to operate under a company structure (most often, a limited company) to maximise their after-tax earnings if they were working through an agency, or if they were a temporary or contract worker. Rather than paying National Insurance and the UK Personal Tax rate of between 22-24%, depending on what they are earning, a worker paid a smaller company tax rate under these structures.
In an effort to minimise avoidance of income tax and national insurance contributions, HM Revenue & Customs (known as HMRC) has created new legislation that revolves around structures it is calling “Managed Service Companies”.
HRMC’s definition of a Managed Service Company (MSC)
“An MSC is a form of intermediary company through which workers provide their services to end clients. The definition of an MSC in the legislation encompasses both ‘composites’ and ‘managed personal service companies’.In essence a scheme provider promotes the use of these companies and provides the structure to workers. The worker (although a shareholder) does not exercise control over the company.”
Source – HM Revenue & Customs
Does the new legislation apply to me?
If you started a limited company in the UK before April 2007, your limited company provided should already have contacted you and let you know how you will be affected by these changes. Going forward, you may still be able to operate a managed company however you must ensure your relationship with your ‘MSC’ provider is tax-compliant
Important: If you believe your managed company fell into the IR35 legislation (like a limited company) prior to 6 April, then make sure you scrutinise your relationship with your provider if they have continued to manage a company for you. If your company falls within the new legislation and if your provider fails to operate PAYE, then you could be held personally liable for any debts incurred.
Links to other information:
HMRC Managed Service Company (MSC) information - http://www.hmrc.gov.uk/employment-status/msc.htm
HMRC IR35 legislation on Ltd Companies
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