You’ve probably heard a lot about the latest Budget changes but how does it really affect you when placing a contractor or freelancer?
Contractors now only have two options:
1. Work through a PAYE umbrella company and pay full income tax and full national insurance contributions on their entire earnings.
A PAYE Umbrella service is where the contractor essentially becomes an employee of the umbrella company and is contracted out to provide their services to the client.
The benefits for the contractors of this method are: it’s very easy to use, they simply submit timesheets and expense details and wait to be paid; all tax and NI is deducted before they receive their money, so they will have no further taxes to pay; it’s ideal if the contract is less than three months. The downsides are: their salary is subject to full PAYE Tax and NI, it’s just like being a permanent member of staff again; the contractor is reliant on the umbrella company to collect their money from the client and then to pay it on to them.
2. Operate through their own limited company, which remains the most tax efficient solution available.
Contracting through a limited company does require a little more work than using an umbrella company, they will need to form a limited company which will just take five minutes and there is a certain amount of paperwork involved, usually about 10 – 15 minutes per month.
Benefits to Contractors of operating through their own limited company include: most importantly – it is the most tax efficient way of working; they can claim a wider range of expenses – accountancy fees, equipment, software etc; have access to the Flat Rate VAT scheme and they keep complete control of their financial affairs, meaning they do not have to risk their money with any third party administrator.
As mentioned above, there is more administration needed but this shouldn’t take anymore than 10-15 minutes per month with the help of a good accountant.
Operating through their own limited company is now the only financially rewarding and realistic option for contractors and freelancers who want to maximise their income and to feel confident they are operating without fear of penalties, interest and back taxes.
Experienced or well read contractors will say to you that they would like to use their own Limited Company as this is a far more tax efficient way of working. The 2007 Budget has not changed this in the least – contractors are still perfectly OK to use their own Company, and indeed ought to do so, but you must ensure it is actually theirs, and not a “scheme”, or worse still a Managed Service Company (MSC) type offering.
The Chancellor of the Exchequer, Gordon Brown, sounded the death knell for Managed Service Companies (MSC) in his recent Budget. He outlawed their use, so from 6th April 2007 they will no longer exist. Gordon Brown said that they are merely tax avoidance devices and so removed any tax advantage associated with them, in fact he made them the least tax efficient way in which to work. This had the effect of removing them completely from the market
For recruiters, contractors running through their own limited company should also remove any hassles they may get surrounding lost or missing payments and issues with expenses.
If recruiters would like further information they could visit the Professional Contractors Associate www.pcg.org.uk or visit one of the many contractor websites such as www.contractoruk.com and www.freelanceuk.com both sites provide a wealth of up to date information regarding legislation changes, advice to contractors and forum/bulleting boards with professional adviser from both the tax and legal world.